THE DCIT, CIRCLE-1(1)(2),, AHMEDABAD vs. CYTESPACE RESEARCH PVT. LTD.,, AHMEDABAD

PER Ms. MADHUMITA ROY -JM:

The instant appeal filed by the Revenue is directed against the order dated 30.09.2016 passed by the Commissioner of Income Tax (Appeals)-1, Ahmedabad under section 143(3) of the Income Tax Act, 1961 (hereinafter referred as to “the Act”) arising out of the order dated 29.01.2016 passed by the DCIT, Circle – 1(1)(2), Ahmedabad for the Assessment Year 2013-14.

- 2 - ITA Nos.3133/Ahd/2016 DCIT vs. Cytespace Research Pvt. Ltd. Asst.Year –2013-14 finalized on 29.01.2016 by making addition/disallowances of Rs.3,41,72,205/- on account of employee’s benefit expense which was, in turn, deleted by the Learned CIT(A). Hence, the instant appeal before us.

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assessee before the Assessing Officer was not found acceptable and finally addition was made. In appeal, as we find from the records that the assessee made the following submissions before the appellate authority: “2.2. The submission filed by the Appellant before CIT (Appeals) is as under:- 1.1 During the year under consideration, the Appellant had incurred employee benefit expenses amounting to Rs.6,25,64,280/- as against expenses amounting to Rs.2,83,92,075 incurred in previous year. 1.2 However, while passing the assessment order, the learned AO disallowed employee benefit expenses amounting to Rs. 3,41,72,205 (Rs. 6,25,64,280 minus Rs. 2,83,92,075) being expenses additionally incurred in the captioned year, AY 2013-14 as compared to employee benefit expenses incurred in the previous year, i.e. AY 2012-13. 1.3 In connection with the above, the Appellant submits that it was incorporated only on 11 March 2011 and hence, FY 2011-12 was the first year of operation. Copy of financial statements for FY 2012-13 is attached as Annexure 1. Accordingly, being the initial year, most of its employees were employed for only part of the year and therefore, employee costs incurred in the first year of operations would always be lower than employee costs incurred in the subsequent years wherein they were employed for the full year. Thus, employee costs of Rs. 2,83,92,075 incurred in previous year, i.e. AY 2012-13 included salary costs of employees which were employed for only part of a year and hence, their only part salary was included in the salary expenses of AY 2012-13. A copy of salary register showing the actual salary paid in AY 2012-13 is attached as Annexure 2. In connection with the same, a few sample copies of the employment contracts of employees are attached as Annexure 3 which also substantiates that they were there employed only for a part of the year, in FY 2011-12. 1.4 Subsequently, in the captioned year, all these employees which were employed for part of the previous year, were employed for full part of the captioned year and hence their total salary expenses for the entire year was included in the only in captioned year, i.e. FY 2012-13. Therefore, upon a comparison of the annualized salary for same employees which were employed in earlier year, i.e. FY 2011-12, the same would amount to Rs.5,90,34,991 against which actual salary paid to them in FY 2012-13 was Rs.3,62,15,515. Hence, in respect of same employees which were employed in both FY 2011-12 as well as FY 2012-13, there was decrease in their salary expenses by Rs.2,27,92,740/-. A detailed comparison of the salary paid in FY 2011-12 and FY 2012- 13 is attached as Annexure 4. 1.5 Further, the Appellant submits that even after considering 49 new employees which were employed only in FY 2012-13, total salary expenses for the FY 2012-13 amounts to only Rs.5,56,89,030 as against annualized -salary expenses of Rs.5,90,34,991 which would have been incurred in FY 2011-12. The working of the same is also attached

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in Annexure 5. Thus, on an overall basis, your Honour would appreciate that salary expenses in the FY 2012-13 has decreased by approximately 5.6% as compared to salary expenses in FY 2011-12. As against the above decrease in salary cost. the turnover of the Appellant had increased by almost 27% from Rs. 4,10,44,812 in F.Y. 2011-12 to Rs.5,21,24,174/- in FY 2012-13. In this regards, it is submitted that the learned AO, Para 3 on page 4 of his assessment order has stated that turnover of the Appellant had reduced by Rs.1,10,79,362 in FY 2012-13 as compared to turnover in FY 2011-12 when in fact it had increased by the said amount of Rs. 1,10,79,362 over the previous year. The same can also be verified from financial statements of FY 2012-13 attached as Annexure 1 above. In view of the above, it is stated that the allegation of the learned AO that there is a sharp increase in salary as compared to the turnover of the Appellant is incorrect and without any basis.

1.6 Further, the learned AO on page 6 of the assessment order has incorrectly held that the salaries of two employees namely Mr. Himanshu Shah (the Chief Financial Officer) and Mr. Suresh Ramu (the Chief Executive Officer) have been increased in the captioned year by an amount of Rs. 26,35,800/- per employee. In this regard, the Appellant submits that both above employees had joined the company only with effect from 1 October 2011. The employment contract of above two employees showing their date of joining is 1 October 2011 is attached as Annexure 6for your ready reference. Thus, both these employees were paid salary only for a part of the FY 2011-12 whereas they were employed for full part of FY 2012-13. Thus, the observations of the learned AO in relation to increase salary are without any basis.

1.7 Further, the learned AO in his assessment order has stated that Appellant had paid Rs.65,00,000/- as bonus to the employees, Mr. Lalit Pai which was without any basis or reason. In this regards, the Appellant submits that it had employed Mr. Lalit Pai was appointed as Head - Partnership and Technology of the company. Prior to his appointment, he was Sr. Vice President and Head - Global Data Management of Quintiles Technologies Private Limited where he worked for almost 10 years. He is qualified engineer and has completed his post graduation from MM, Calcutta. His resume is attached as Annexure 7 which shows his rich experience in this field. In his prior organization he was heading business of USD 500 million spread over 6 countries. He had relationships with global pharmaceutical companies in US, Europe and Japan. In view of his rich experience and relationships, he was appointed by the company. In the company he is responsible for building and developing sales plans, mentor sales teams and managing relationships with customers. It was due to his rich experience and expertise he brought on, he contributed to the increase in turnover of the company.

1.8. In view of the above, it is respectfully submitted that, as Mr. Lalit Pai was bringing rich experience and expertise he was given onetime bonus of Rs. 65,00,000/- at the time of joining the company. The said amount was decided in the employment contract and hence, as per the contractual terms, the same was paid to him. A copy of the contract with Mr. Lalit Pai is attached as Annexure 8to substantiate the same. Further, Appellant has also deducted taxes due under section 192 of the Act on entire payment

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made to Mr. Lalit Pai. Hence, the entire expenditure was genuine and TDS was appropriately deducted on the same. Thus, the allegation of the learned AO that amount paid to Lalit Pai was without any business expediency is incorrect and without any basis.

1.9 In addition to the above, the learned AO has alleged that Mr. Bhavesh Acharya, an employee of the company was paid higher salary to compensate for losses incurred investment made in the Appellant Company. The Appellant Company had appointed Mr.Bhavesh Acharya as Senior Director - Project Solutions only on 4 August 2012 and hence; there was no increase in salary as compared to earlier year, as he was not at all Employeed in FY 2011-12. Hence, there is no question of any compensation being paid to him for loss in his investment value. Accordingly, it seems that there is some misunderstanding while replying to question no. 7 recorded by learned AO under section 131 of the Act. Copy of statement of Mr. Bhavesh Acharya recorded under section 131 of the Act enclosed as Annexure 9. Further, the salary paid to him was the same as agreed in the employment contract which is attached as Annexure 10 for your ready reference. Thus, the observations of the learned AO that Mr. Bhavesh Acharya was compensated for fall in investment value is incorrect and without any basis.

1.10 Further, Mr. Bhavesh Acharya brought a total of 19 years of experience in Clinical Data Management and 4 years in Site Management to the Appellant company which substantiated salary paid to him. Copy of his resume showing his rich qualifications and experience is attached as Annexure 11 for your ready reference.

1.11 Based on the above, it is submitted that action of learned AO in disallowing salary expenses is without any basis and is based on mere surmises and conjectures.

1.12 Commercial expediency of the payments:- Without prejudice to the fact that the Appellant has received services from its employees and there is no dispute with regards to rending of such services, the Appellant submits that reasonableness of employee expenses is not relevant for claiming deduction of expenses under section 37(1). Further, it is submitted that the commercial expediency/ business rationale of a particular expenditure incurred by the Appellant for smooth functioning and furtherance of its business prerogative. Hence, no disallowance under section 37(1) of the Act should be made on the basis that expenses is found to be unreasonable or excessive.

1.13 In this regards, the Appellant humbly submits that the above expense have been incurred wholly and exclusively for the purpose of the Appellant's business and the learned AO has nowhere contended that these expenses were not undertaken for the purpose of business. Accordingly, as all salary expenses were incurred wholly and exclusively for the purpose of business of the Appellant, the same should be allowed as a deduction under section 37(1) of the Act.

1.14 In this regard, Appellant submits that Hon'ble Supreme Court in the case of Sassoon J David and Co (P) Ltd v CIT (118ITR 261), observed as follows:

- 6 - ITA Nos.3133/Ahd/2016 DCIT vs. Cytespace Research Pvt. Ltd. Asst.Year –2013-14 “It has to be observed here that the expression "wholly and exclusively" used in s. 10(2)(xv) of the Act does not mean "necessarily". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. It is relevant to refer at this stage to the legislative history of s. 37 of the I.T. Act, 1961, which corresponds to s. 10(2)(xv) of the Act. An attempt was made in the I.T. Bill of 1961 to lay down the "necessity "of the expenditure as a condition for claiming deduction under s. 37. Section 37(1) in the Bill read "any expenditure ...... laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed ...........". The introduction of the word "necessarily" in the above section resulted in public protest. Consequently, when s. 37 was finally enacted into law. the word "necessarily "came to be dropped." 1.5 Thus, based on the above ruling it is evident that as long as assessee has incurred any expenditure for the purpose of its business, it would be allowed as a deduction even if there was no compelling necessity to incur such expenses. 1.16 Further, Hon'ble Supreme Court in the case of CIT v Malayalam Plantations Ltd (53 ITR 140), has explained the concept 'for the purpose of business' as follows: “The expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits". Its range is wide: it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business..... The purpose shall be purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assesses shall incur it in his capacity as a person carrying on the business…” 1.17 The above observations bring out the following attributes in respect of the expenditure that may be allowable: • what is comprehended as an allowable expenditure is a very wide spectrum of expenditure; • in order that the expenditure qualifies as expenditure incurred 'wholly and exclusively for the purposes of the business', it is not required to conclusively demonstrate that the expenditure was incurred out of a compelling necessity, but was incurred on for the purpose of assessee's business;

- 7 - ITA Nos.3133/Ahd/2016 DCIT vs. Cytespace Research Pvt. Ltd. Asst.Year –2013-14 • It is for the assessee to decide whether any expenditure should be incurred in the course of his business. 1.18 Further, there are various judicial precedents which have recognized that any expenses incurred wholly and exclusively for the purposes of the Assessee's business are to be allowed as a deduction and reasonableness of the expenditure cannot be taken as a plea to disallow the same. 1.19 It is not open to the department to adopt a subjective standard of reasonableness and decide what type of expenditure the assessee should incur and in what circumstances. The department cannot justifiably claim to put itself in the chair of the businessman and assume the said role to decide how much is a reasonable expenditure having regard to the circumstances of the case. 1.20 Reliance in this regard is placed on the following judicial precedents: • CIT v Dhanrajgirji Raja Narasingirji (91 ITR 544) (SC), the Hon'ble Supreme Court has held as follows: “It is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best.” Thus, whether or not a particular expenditure has to be incurred, depends on the perception of the businessman / assessee, and this business perception cannot be substituted by the revenue's perception of whether or not such expenditure should have been incurred. • In CIT v Panipat Woolen and General Mills (103 ITR 66) (SC), the Hon'ble Supreme Court has held that: “Before coming to the facts it may be necessary to mention that there can be no dispute with respect to the two important propositions: (1) That in order to fall within section 10(2)(xv) of the Act1 the deduction claimed must amount to an expenditure which was laid out or expended wholly and exclusively for the purpose of the business, profession or vocation. This will naturally depend upon the facts of each case. (2) That in order to determine the question of reasonableness of the expenditure, the test of commercial expediency would have to be adjudged from the point of view of the businessman and not of the income-tax department." • CIT v Khambatta family Trust (2013) 34 taxmann.com 36 (Gujarat High Court)

- 8 - ITA Nos.3133/Ahd/2016 DCIT vs. Cytespace Research Pvt. Ltd. Asst.Year –2013-14 In the light of the principles propounded in the decisions referred to hereinabove, it is apparent that while examining a claim for deduction under section 37 of the Act, what has to be seen is whether the expenditure had been incurred wholly and exclusively for the purpose of the assessee's business and whether it falls under any of the exceptions carved out under sub-section (2B) thereof, and nothing more. Once it is found that the expenditure had been incurred by the assessee for publicity or advertisement, it is not for the department to consider what commercial expediency justified such expenditure. It is, therefore not permissible for the Assessing Officer to scrutinize the claim any further to examine as to whether in the process any third party has also benefited. The mere fact that on account of the expenditure incurred by the assessee wholly and exclusively for its own business, incidentally some third party is also benefited is no ground to disallow any part of such expenditure. • CIT vs Jagannath Kisonlal(30 ITR 654)(Bom) subsequently approved by the Supreme Court (41 ITR 360), it has been held as follows: "An expenditure may not help an assessee to earn the income or to increase the income, and yet from the point of view of commercial expediency it may be necessary for the business; for instance, it may be necessary to preserve the assets of the business or to increase the reputation of the business. It may not bring in results in the sense of increased income and yet a commercial man may think that those expenses are necessary from a commercial point of view for the purpose of the business." • Commissioner of Income-tax v Sales Magnesite (Pvt.) Ltd. (214 ITR 1)(Bom) "The question whether expenditure incurred for the purposes of business must be viewed in the larger context of business necessity or commercial expediency. No abstract or pedantic view can be taken in the matter". 1.21 Based on the above judicial precedents, the Assessee would like to emphasize that the learned AO should not examine or question the commercial expediency of the expenditure being incurred by the Assessee and accordingly, the same should be allowed as a deduction in its entirety. 1.22 Accordingly, it is humbly submitted that the disallowance made by the learned AO, on account payment of salary expenses treating the same as excessive, is bad in law and hence the Appellant requests that the learned AO be directed to delete the said disallowance. 2.3 Further, the appellant has submitted the submission dt. 20/09/2016 before CIT (Appeals) is reproduced as under:- 1.1 In the instant case, the learned AO had contended that salary of directors / employees were increased without any justification. Further, the learned AO had also

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held that joining bonus of Rs. 65,00,000/- paid to Lalit Pai was without any reason or business expediency. Accordingly, the learned AO has disallowed employee benefit Expenses amounting to Rs. 3,41,72,205 (Rs.6,25,64,280 minus Rs. 2,83,92,075) being Expenses additionally incurred in the captioned year, AY 2013-14 as compared to Employees benefit expenses incurred in the previous year, i.e. AY 2012-13 without any basis .

1.2 In this regards, as mentioned in our earlier submission dated 22 August 2016, Appellant respectfully submits that increase in salary expenses in the captioned year was only because of employees were employed for full year in the captioned year whereas they were employed for only part of the previous year. Further, all salary payment made to employees / directors were made for the purpose of its business and commensurate with the services rendered by them and the same was in no manner excessive and the same was for the purpose of business of the company. Additionally, there is no dispute by the by the Learned AO that all employees and directors have rendered services during the captioned year. Further, the learned AO has no where disputed payments made to directors were excessive under section 40A(2)(b) of the Act.

1.3 Additionally, the Appellant also submits that remuneration paid to its directors as well as its employees Lalit Paiand Bhavesh Acharya which were treated to be excessive by the Learned AO have been taxed as salary income in hands of its directors and its employees. Further, they are covered in the highest tax bracket of 30 percent. In this Regard, copy of acknowledgment of return of income for AY 2013-14 pertaining to directors, Suresh Ramu and Himanshu Shah and employees, Lalit Pai and Bhavesh Acharya are attached as Annexure 1, Annexure 2, Annexure 3 and Annexure 4 respectively. The said acknowledgment of return of income for the captioned year substantiates that they are covered in highest tax bracket of 30 percent. Hence, as the Appellant as well as its Directors and employees were both assessed tax at the rate of 30%, the issue is revenue neutral. 1.4 The learned AO has failed to appreciate that tax has already been paid on such income by the Directors and its employees. Hence, the disallowing the same in the hands of the Appellant would tantamount to double taxation.

1.5 In this regard, Appellant would additionally like to submit that the jurisdictional Hon'ble Gujarat High Court in the case of PWS Engineers Limited vs. DCIT (Tax Appeal No. 209 of 2015) has held that where remuneration was taxed in the hands of director at the same rate at which it would have been taxed in the hands of the company, The same would be revenue neutral. Hence, disallowing the remuneration to be excessive in the hands of the company, would amount to double taxation which is not possible. Accordingly, Hon'ble High Court allowed the appeal of the company. The relevant portion of the judgment is as under:

"In this context, we may recall that consistently before Assessing Officer, CIT(Appeals) and Tribunal, the assessee and convassed that all the four Directors who had received such remuneration, were taxed in the highest bracket

- 10 - ITA Nos.3133/Ahd/2016 DCIT vs. Cytespace Research Pvt. Ltd. Asst.Year –2013-14 of 30%; at the same rate at which the assessee company at the relevant time was assessed. In fact, the assessee had demonstrated before CIT(Appeals) that the tax liability of the company on such disputed remuneration about was exactly the same as the tax the four Directors had paid to the Revenue. To these factual aspects, even the Revenue has, at no stage raised any dispute. We, may therefore, proceed on the basis that the element of excessive remuneration represents that income of the company which was eventually taxed in the hands of the Directors at the same rate at which; had it not been so distributed; would have been, taxed in the hands of the company. In that view of the matter, the question of revenue neutrality would immediately arise. A certain income has already been taxed in the hands of the Directors. Permitting the Revenue to tax the same income again at the same rate in the hands of the principal payer would amount to double taxation. Only on this count, we answer question in favour of the appellant- assessee and against Revenue, allow the Appeal and set aside the order of the Tribunal. The Tax Appeal is disposed of accordingly."

1.6 Based on the above judicial precedent, it is humbly submitted that the disallowance made by the learned AO, on account payment of salary expenses treating the same as excessive, is bad in law and hence the Appellant requests that the learned AO be directed to delete the said disallowance".

Ultimately, addition was deleted by the Learned CIT(A) upon considering such submission made by the Assessee and also upon taking into consideration the financial statement placed before the first appellate authority and the judgment relied upon by the assessee in support of his case.

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there was no compelling necessity to incur such expenditure. In this aspect reliance were placed in the judgment passed by the Apex Court in the matter of Sassoon J. Devid and Co. (P) Ltd.-vs-CIT reported in 118 ITR 261. Apart from that where remuneration was taxed in the hands of the directors at the same rate at which it would have been taxed in the hands of the company the same would be revenue neutral. The judgment passed by the Jurisdictional High Court in the case of PWS Engineers Ltd.-vs-DCIT in Tax Appeal No.209/2015 was relied upon by the Learned AR. He, therefore, prays for confirmation of the order passed by the Learned CIT(A). On the other hand, the Learned DR relied upon the order passed by the Learned AO.

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same would amount to Rs.5,90,34,991 against which actual salary paid to them in FY 2012-13 was Rs.3,62,15,515. Hence, in respect of same employees which were employed in both FY 2011-12 as well as FY 2012-13, there was decrease in their salary expenses by Rs. 2,27,92,740/-. A detailed comparison of the salary paid in FY 2011-12 and FY 2012-13 is attached as Annexure 4. 2.5.1. Further, the Appellant submits that even after considering 49 new employees which were employed only in FY 2012-13, total salary expenses for the FY 2012-13 amounts to only Rs.5,56,89,030/- as against annuallzed salary expenses of Rs. 5,90,34,991/- which would have been incurred in FY 2011-12. The working of the same is a/so attached in Annexure 5. Thus, on an overall basis, it would be appreciated that salary expenses in the FY 2012-13 has decreased by approximately 5.6% as compared salary expenses in FY 2011-12. As against the above decrease in salary cost, the turnover of the Appellant had increased by almost 27% from Rs.4,10,44,812/- in FY 2011-12 to Rs.5,21,24,174/- in FY 2012-13. In this regards, it is submitted that the AO, para 3 on page 4 of his assessment order has stated that turnover of the Appellant had reduced by Rs. 1,10,79,362/- in FY 2012-13 as compared to turnover in FY 2011-12 when in fact it had increased by the said amount of Rs. 1,10,79,362/- over the previous year.

2.5.2. Further, the Appellant submits that AO on page 6 of the assessment order has incorrectly held that the salaries of two employees namely Mr. Himanshu Shah (the Chief Financial Officer) and Mr. Suresh Ramu (Chief Executive Officer) have been increased in the captioned year by an amount of Rs. 26,35,800/- per employee. In this regard, the Appellant submits that both above employees had joined the company only with effect from 1 October 2011. The employment contract of above two employees showing their date of joining is 1 October 2011 is attached as Annexure 6 for reference. Thus, both these employees were paid salary only for a part of the FY 2011-12 whereas they were employed for full part of FY 2012-13. Thus, the observations of the learned AO in relation to increased salary are without any basis. 2.5.3. Further, the Appellant submits that AO in his assessment order has stated that Appellant had paid Rs. 65,00,000/- as bonus to the employees, Mr. Lalit Pai which was without any basis or reason. In this regards, the Appellant submits that it had employed Mr. Lalit Pai was appointed as Head - Partnership and Technology of the company. He is qualified engineer and has completed his post graduation from IIM, Calcutta. His resume is attached as Annexure 7 which shows his rich experience in this field. In his prior organization he was heading business of USD 500 million spread over 6 countries. He had relationships with global pharmaceutical companies in US, Europe and Japan. In view of his rich experience and relationships, he was appointed by the company. It was due to his rich experience and expertise he brought on, he contributed to the increase in turnover of the company. The said amount was decided in the employment contract and hence, as per the contractual terms, the same was paid to him. A copy of the contract with Mr. Lalit Pal is attached as Annexure 8 to substantiate the same. Further, Appellant has also deducted taxes due under section 192 of the Act on entire payment made to

- 13 - ITA Nos.3133/Ahd/2016 DCIT vs. Cytespace Research Pvt. Ltd. Asst.Year –2013-14 Mr.Lalit Pai. Hence, the entire expenditure was genuine and TDS was appropriately deducted on the same. Thus, the allegation of the learned AO that amount paid to Lalit Pai was without any business expediency is incorrect and without any basis. 2.5.4. In addition to the above, the learned AO has alleged that Mr. Bhavesh Acharya, an employee of the company was paid higher salary to compensate for losses incurred in investment made in the Appellant Company. The Appellant company had appointed Mr. Bhavesh Acharya as Senior Director - Project Solutions only on 4 August 2012 and hence, there was no increase in salary as compared to earlier year, as he was not at all employed in FY 2011-12. Hence, there is no question of any compensation being paid to him for loss in his investment value. Accordingly, it seems that there is some misunderstanding while replying to question no. 7 recorded by learned AO under section 131 of the Act. Copy of statement of Mr. Bhavesh Acharya recorded under section 131 of the Act is enclosed as Annexure 9. Further, the salary paid to. him was the same as agreed in the employment contract which is attached as Annexure 10 for your ready reference. Thus, the observation of the AO that Mr. Bhavesh Acharya was compensated for fall in investment value is incorrect and without any basis. 2.5.5. The appellant has further submitted that there is no dispute with regards to rendering of such services; the Appellant submits that reasonableness of employee expenses is not relevant for claiming deduction of expenses under section 37(1). Further, it is also submitted that the commercial expediency/ business rationale of a particular expenditure incurred by the Appellant for smooth functioning and furtherance of its business is its prerogative. Hence, no disallowance under section 37(1) of the Act should be made merely on the basis that expenses is found to be unreasonable or excessive. In this regards, the Appellant humbly submits that the above expense have been incurred wholly and exclusively for the purpose of the Appellant's business and the learned AO has nowhere contended that these expenses were not undertaken for the purpose of its business. In this regards, Appellant submits that Hon'ble Supreme Court in the case of Sassoon J David and Co (P) Ltd v CIT (118 ITR 261)held that as long as assesses has incurred any expenditure for the purpose of its business, it would be allowed as a deduction even if there was no compelling necessity to incur such expenses. Further, Hon’ble Supreme Court in the case of CIT v Malayalam Plantations Ltd (53 ITR 140), has explained the concept 'for the purpose of business' as "The expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits". The appellant has further submitted the judicial decisions as supra. 2.5.6. The appellant has made further submission dated 20th September 2016 and reiterated the same as submitted earlier. The Appellant has submitted acknowledgment of return of income for AY 2013-14 of the two directors, namely Himanshu Shah and Suresh Ramu and the two employees, Bhavesh Acharya and Lalit Pai. It is evident from the same that all the employees/directors have paid taxes in the highest tax bracket of 30 percent. This substantiates that both Appellant company as well as its Directors and employees were assessed to tax at the highest rate of 30% and hence, this entire issue is revenue neutral In this regard, Appellant has submitted that the jurisdictional Hon'ble Gujarat

- 14 - ITA Nos.3133/Ahd/2016 DCIT vs. Cytespace Research Pvt. Ltd. Asst.Year –2013-14 High Court in the case of PWS Engineers Limited vs DCIT (Tax Appeal No. 209 of 2015) has held that where remuneration was taxed in the hands of director at the same rate at which it would have been taxed in the hands of the company, the same would be revenue neutral. Hence, disallowing the remuneration to be excessive in the hands of the company, would amount to double taxation which is not possible. Accordingly, Hon'ble High Court allowed the appeal of the company. 2.6. I have carefully considered the facts of the case, the assessment order and the written submissions of the Appellant. The Appellant has contended that it was incorporated only on 11 March 2011 and since AY 2012-13 was the first year of operation and accordingly, salary payments consisted of employees which were employed only for part of the year. However, all these employees were employed for full year in AY 2013-14. As per the working submitted by the Appellant, majority of employees were employed in AY 2012-13 for only part of the year. Accordingly, if their salary is computed for 12 months, salary expenses would be Rs. 5,90,34,991/- as against actual salary expenses of Rs. 5,56,89,030/- incurred in AY 2013-14. In fact on an annualized basis, the salary has reduced by 5.6%. Thus, the contention of the AO that there was an increase in salary expenses in AY 2013-14 is factually incorrect. 2.6.1. Further, as per the signed financial statements submitted by the Appellant, the turnover of the Appellant, has increased by almost 27 percent from Rs, 4,10,44,812/- in AY 2012-13 to Rs. 5,21,24,174/- in AY 2013-14. Therefore, the contention of the AO that there is a sharp increase in salary expenses whereas the turnover has decreased is factually incorrect. As regards increase in salary paid to the two directors namely Himanshu Shah and Suresh Ramu in AY 2013-14, it is again observed that both of them were only employed for 6 months in AY 2012-13 whereas they were employed for the full part in AY 2013-14. As per the employment contract signed between the Appellant company and Suresh Ramu and Himanshu Shah, it is observed that they were both appointed on 1 October, 2011. Hence, their salary in AY 202-13 was only for 6 months whereas in AY 2013-14, they were employed for a complete period of 12 months. Hence, there is no actual increase in the salary paid to them in AY 2013-14. 2.6.2. Similarly, in the case of Shri Bhavesh Acharya based on statement recorded u/s 131, the AO observed that he was paid salary higher to compensate for the losses incurred to him due to investment made in the company. The Appellant submitted the employment contract entered with Shri Bhavesh Acharya which shows that he was only employed on 4 August 2012 (AY 2013-14), therefore, the question of increase in salary in AY 2013-14 as compared to the salary paid in AY 2012-13 does not arise. Accordingly, the statement of Mr. Bhavesh Acharya recorded by the AO u/s 131 that he was compensated for loss of investment may be factually incorrect as Mr. Bhavesh Acharya was employed for the first time only in AY 2013-14. Further, with regards to the joining bonus of Rs. 65,00,000/- paid to Shri Lalit Pal, it is evident that he has rich qualification and experience. The amount paid to him was as per the employment contract and it is not open for the AO to question the commercial expediency of a businessman.

- 15 - ITA Nos.3133/Ahd/2016 DCIT vs. Cytespace Research Pvt. Ltd. Asst.Year –2013-14 2.6.3. On a careful examination of the entire facts of the case, it is noted that the AO has nowhere disputed that the employees/directors have not rendered any services to the Appellant company. Hence, there is no dispute on factum of services rendered by Directors/employees. Further, the AO has not disallowed any expenses u/s 40A(2)(b) of the Act. It is a settled law that the reasonableness of employee expenses is not relevant to claiming deduction of expenses under section 37(1) of the IT Act. Additionally, the commercial expediency / business rationale of a particular expenditure incurred by an assessee for the smooth functioning and furtherance of its business is its prerogative and hence, the same cannot be questioned by the AO. Further, I find that in following judicial precedents, Hon'ble Supreme Court has specifically held that it is for the assessee to decide which expenditure has to be incurred in its business and the same cannot be decided by the AO. Sassoon J David and Co (P) Ltd v CIT (118 ITR 261), observed as follows:

"It has to be observed here that the expression "wholly and exclusively" used in s. 10(2)(xv) of the Act does not mean " necessarily". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under s. 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure." In the case of CIT v Dhanrajgirji Raja Narasingirji (91 ITR 544) (SC), the Hon'ble Supreme Court has held as follows:

"It is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best."

Similarly, there are also several High Court judgments which have followed the above Supreme Court rulings and held that commercial expediency of expenditure cannot be questioned. Therefore, based on the above judicial precedents and facts of the case, it can be observed that it is not for the AO to question the commercial expediency of a certain expenditure incurred by the Appellant. Therefore, salary expenses incurred wholly and exclusively for the purpose of business should be allowable as a deduction u/s 37(1) of the Act. 2.6.4. Additionally, the Appellant has submitted acknowledgment of return of income for AY 2013-14 of the two directors, namely Himanshu Shah and Suresh Ramu and the two employees, Bhavesh Acharya and Lalit Pal. It is evident from the same that all the employees/directors have paid taxes in the highest tax bracket of 30 percent. This substantiates that both Appellant company as well as its Directors and employees were assessed to tax at the highest rate of 30% and hence, this entire issue is revenue neutral. Accordingly, even on the grounds of revenue neutrality, disallowing the income in hands

- 16 - ITA Nos.3133/Ahd/2016 DCIT vs. Cytespace Research Pvt. Ltd. Asst.Year –2013-14 of the Appellant Company when it was already taxed in the hands of directors and employees would tantamount to double taxation. Further, Appellant's case is also covered by judgment of jurisdictional Hon'ble Gujarat High Court in the case PWS Engineers Limited v/s DCIT (Tax Appeal No. 209 of 2015) wherein it was held on grounds of revenue neutrality if once the income is being charged in the hands of the directors in the highest tax bracket, taxing the same in the hands of the company would amount to double taxation. Hence, based on the facts of the case and the various judicial precedents cited by the Appellant, I find that the AO was incorrect in disallowing employee benefit expenses amounting to Rs.3,41,72,205/- and the same should be allowed u/s 37(1) of the Act. The A.O. is directed to give relief accordingly. The ground of the appeal is allowed.”

We find that the appellant justified that the turnover of the appellant has increased by an amount of Rs.1,10,79,362/- over the previous year which has been verified from the financial statement by the Learned CIT(A). So far as the increase of the salary of the employees namely Himanshu Shah being the Chief Financial Officer, Mr. Suresh Ramu being the Chief Executive Officer the assessee has been able to show that both the employees were paid salary only for a part of F.Y. 2011-12 whereas they were employed for full part of F.Y. 2012-13. The payment made to Shri Lalti Pai to the tune of Rs.65,00,000/- has also been justified by the assessee taking into consideration his academic background and immense experience in this field. The payment made to Bhavesh Acharay having 19 years of experience in clinical data management and 4 years in site management was also explained by the assessee relying upon his rich qualifications and experience. All this doubts/points raised by the Learned AO were carefully considered by the Learned CIT(A) while deleting addition made by the Learned AO.

We have also carefully considered the judgment relied upon by the Learned AR. We find from the judgment passed by the Hon’ble Apex Court in the matter of Sassoon J. David and Co (P) Ltd.-vs-CIT reported in 118 ITR 261, that reasonableness of employee’s expenses is not relevant to claiming deduction of expenses under section 37(1) of the Act. Additionally commercial expediency/business rational of a particular

- 17 - ITA Nos.3133/Ahd/2016 DCIT vs. Cytespace Research Pvt. Ltd. Asst.Year –2013-14 expenditure incurred by an assessee for the smooth running and furtherance of its business is its prerogative and hence the same cannot be questioned by the Revenue. The question regarding tax revenue neutrality on the fact that if the income is being charged in the hands of the directors in the highest rate bracket taxing the same in the hands of the company would amount to double taxation as has been decided in the judgment of PWS Engineers Ltd.-vs-DCIT in Tax Appeal No.209 of 2015 passed by the Jurisdictional High Court has been duly taken care of by the first appellate authority. Hence taking into consideration the entire aspect of the matter, we find no infirmity in the order passed by the Learned CIT(A) in deleting the addition applying the ratio laid down by the Juridical pronouncement as mentioned above so as to warrant interference. Thus, the question is accordingly answered in the affirmative i.e. in favour of the assessee and against the revenue. Consequently, the appeal fails and is accordingly dismissed.

Sd/- Sd/- (WASEEM AHMED) ( Ms. MADHUMITA ROY) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 30/07/2019 Priti Yadav, Sr.PS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-1, Ahmedabad. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. 6. गाड� फाईल / Guard file. आदेशानुसार/BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad