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Income Tax Appellate Tribunal, AHMEDABAD – BENCH ‘D’
Before: SHRI RAJPAL YADAV & SHRI WASEEM AHMED
आयकर अपील�य अ�धकरण, अहमदाबाद �यायपीठ - अहमदाबाद । IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD – BENCH ‘D’
BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER आयकर अपील सं./ ITA No. 1655/Ahd/2015 �नधा�रण वष�/Assessment Year: 2011-12 Sharma Cars P.Ltd. DCIT, Cir.8 “Kayakalp”, N.H. No.8 Vs Ahmedabad. Naroda, Ahmedabad 382330.
PAN: AADCS 0305 E अपीलाथ�/ (Appellant) �� यथ�/ (Respondent) Assessee by : Shri T.P. Hemani, and Shri P.B. Parmar, AR Revenue by : Shri Vinod Tanwani, Sr.DR
सुनवाई क� तार�ख/Date of Hearing : 11/01/2019 घोषणा क� तार�ख /Date of Pronouncement : 01 / 02/2019 O R D E R PER RAJPAL YADAV, JUDICIAL MEMBER : Assessee is in appeal before the Tribunal against order of the ld.CIT(A)-9, dated 9.3.2015 passed for the Asstt.Year 2011-12.
In the first ground of appeal, the assessee has pleaded that the ld.CIT(A) has erred in confirming the disallowance of Rs.1,50,73,321/- which was disallowed by the AO with the aid of section 40A(2) of the Income Tax Act, 1961.
Brief facts of the case are that the assessee at the relevant time was having dealership and service centre of Hyundai Cars. It has filed its
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return of income on 28.9.2011 declaring total income at Rs.77,34,656/-. The case of the assessee was selected for scrutiny assessment and notice under section 143(2) of the Act was issued and served upon the assessee. On scrutiny of the accounts, the ld.AO harboured a belief that the assessee had shown an increase in expenditure on account of payment towards salary at 177.5% as against an increase of 62.9% in the turnover from the preceding year. He issued a show cause notice to the assessee inviting its explanation as to show the details of person to whom salaries have been paid, falls within the ambit of section 40A(2)(b) i.e. related persons. The ld.AO thereafter compiled a details showing details of persons to whom salaries have been paid in this assessment year vis-à- vis in earlier years. In response to the query of the AO, the assessee has filed a chart containing details of 23 employees; their designation in the company, nature of work undertaken by them, age, qualification and total salary paid to them. These details have been reproduced by the ld.AO on page no.3 to 5 of the assessment order. Such details read as under: Name of Employee Designation Nature of work Age Sr. Qualification Total Salary No. Dipesh N. Sharma C.E.O. PCDBEM 1224720 Overall Finance and 1 29 Working Capital Management C.E.O. 30 1236168 2 Mayur S. Overall Operation of the M.E. Sharma Company - sales Automobile B. Com. 1236168 3. Jitendrahhai K. DGM - Overall Operation of the 50 Sharma After Sales Company - Service Branches B. Com. 627576 4. Devendrabhai K. Manager Overall Operation of 53 Sharma -Advantage Advantage Branch 28 B.A. 5. Prashant D. Manager - Effective Operation for 841930 Sharma Body Shop Body Shop Department - Naroda
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27 6 Jignesh N. GM- Overall operation of MBA-Family 1201819 Sharma Business Accounts department Accounts across all branches
7 GM~ Sales 31 MBA- 1200000 Bhavesh S. Overall Management of Sharma Marketing Sales - Showrooms - 2 Branches
8 30 B.Com. 840000 Ajay D. Accounts Overall Account Sharma in charge - Operation of Naroda Naroda Branch
9 CRM- Sales 29 MBA 810000 Ann Mayur Customer Care & Sharma Relationship Management
10 B.A. Chanda Surendra Insurance Handling work of 52 780000 Sharma Coordinator - Insurance for Sales Sales Branches
11 Chintan MBA - HR H.R. Recruitment and Labour 23 1200000 Manager law matters Subhash Sharma
Mahendra K. Spares in Spares & Accessories 12 55 B.Com 840000 Sharma Charge Stock Management
13 27 M. Com. Prlyanka Prasant Insurancve Handling work of 780000 Sharma Coordinator Insurance for Shyamal -Shy 'am al Sales Branches
14 Priyanka Uftam Warranty Warranty Claims Follow- 25 M.Phil 780000 Sharma Incharge up, Audit Query replies to HMIL 15 Pushpa CRM - Customer Care & 46 B.A. 780000 Subhash Sharma Service (City Relationship Management Workshop) - City Workshop 16 Rajshree Admin Housekeeping Security 43 B.A. 780000 Jitendra Sharma Incharge and Overall maintenance (Naroda) Naroda Workshop Branches 17 Santosh Claims Claims Approval and 51 B.A. 780000 Mahendra Sharma Manager - Outstanding Follow up Sales for Sales related claims to HMJL 18 Sita Narendra Admin Housekeeping Security 47 M.Com 780000 Sharma incharge and Overall maintenance (Florence) City Workshop Sales Showrooms
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19 Sunita Bhavesh Finance Overall Finance - Sales, 32 M.A. 810000 Sharma in charge Outstanding follows for Commission with Finance Companies 20 Sunita Devendrqa CRM - Customer Care & 48 B.A. 780000 Sharma Service Relationship Management (Naroda - Naroda Workshop Workshop) 21 Uttam M. Sharma G.M.- Overall Management of 27 B.Com. 840000 Services (City Sales City Service Center Workshop) 22 Vandana Dipesh DGM Sales Corporate Sale 28 M. Com. 810000 Sharma -Corporate Department Manager 23 Vivek Jitendra Manager Body shop Parts 25 B.Com. 840000 Sharma -Spares Management Body shop
The AO was of the opinion that salary paid by the assessee to the persons covered under sub-clause (b) of section 40A(2) of the Income Tax Act deserves to be disallowed. He noticed details of such related persons and the salaries paid to them. Thereafter, he disallowed a sum of Rs.1,50,73,321/-. Relevant discussion made by the AO on page no.17 of the assessment order reads as under:
3.9 The assessee has made following salary payments to the 'related persons'.
Sr. Name of Employee Amount paid No.
1 Surendra Kanaiyalal 18,00,000 Sharma 2 Narendra Kanaiyalal 18,00,000 Sharma 3 18,00,000 Subhash Kanaiyalal Sharma 4 Dipesh Narendrabhai 12,24,720 Sharma 5 Mayur Surendrabhai 12,36,168
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Sharma 6 Jitendra Kundanlal Sharma 6,27,576
Devendra Kundanlal 7 6,27,576 Sharrna
8 Prashant Devendra Sharma 8,41,930
9 Jignesh Narendra Sharma 12,01,819
10 Bhavesh Surendra Sharma 12,00,000
11 Ajay Devendra Sharma 8,40,000
12 Chintan Subhash Sharma 12,00,000
13 Chanda Surendra Sharma 7,80,000
Mahendra Kundanlal 14 8,40,000 Sharma
15 Pushpa Subhash Sharma 7,80,000
16 Sita Narendra Sharma 7,80,000
17 Vivek Jitendra Sharma 8,40,000
18 Sunita Devendra Sharma 7,80,000
19 Rajshree Jitendra Sharma 7,80,000
TOTAL 1,99,79,789
Since, there is an increase in turnover of 62.9% during the year under consideration as compared to the preceding year and opening of two new sales branches necessitated the recruitment of additional manpower, the increase in salary upto 100% compared to the preceding year is considered to be justified. Total salary paid to the 'related persons' during the preceding year i.e. F.Y.2009-10 is Rs.24,53,234/-. Accordingly, salary payment to the 'related persons' upto Rs.49,06,468/-
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only is considered to be reasonable. The balance amount of Rs.1,50,73,321/- is hereby disallowed and added to the total income of the assessee as per the provisions of section 40A(2) of the Act and also in view of the reasons stated in Para 3.5 of this order. Penalty proceedings u/s. 271(1)(c) are initiated for furnishing inaccurate particulars of income.”
Dissatisfied with the disallowance, the assessee carried the matter in appeal before the ld.CIT(A) and filed detailed submission which has been reproduced by the ld.CIT(A) from page nos.2 to 17 of the impugned order. However, the ld.CIT(A) was not satisfied with the explanation of the assessee, and he concurred with the AO. The finding recorded by the ld.CIT(A) in para 2.3 reads as under:
“2.3 I have carefully considered the rival submissions. I have also perused the case laws relied upon by the appellant. The A.O. has also discussed the issue on the line that "had the company not paid such excessive remuneration to these Directors and paid them more reasonably, it would have had much higher profits. In that case, in order to transfer such gains to these Directors, who are also the shareholders and promoters of this company, it would have had much higher profits by way of Dividend and would have had to incur 15% Dividend Distribution Tax. By camouflaging transfer of profits as excessive, unreasonable and unjustified remuneration, the assessee company has transferred profits to select shareholders, related persons and has escaped the payment of Dividend Distribution Tax. It is seen that directors remuneration and persons who are apparently related, has been disallowed as per the provisions of sec. 40A(2) of the I.T. Act. In view of this, at the outset I would like to discuss the provisions of sec. 40A(2) of the I.T. Act and its applicability in the case of the appellant. The provisions of sec,40A starts with non obstante clause and have overriding effect over the provisions of any other section of Income-tax Act, 1961. It was held by the Hon'ble Supreme Court in Shri Sajjan Mills Ltd. vs CIT (1985) 156 ITR 585(SC). Further Hon'ble Guj'arat High Court in CIT vs Bharat Vijay Mills Ltd. (1988) reported at 128 ITR 633 (Guj.) has held that provisions of sec.40A have been declared to be of overriding nature. The non obstante clause at the beginning of sec. 40A(1) clearly
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indicate that if any other provisions exist somewhere on the statute book, they have to give way to clear the express provisions of sec.40A.
3.3 The above discussion clearly reveals that the excessive remuneration to directors and related persons can always be disallowed as per the provisions of sec. 40A(2) of the I.T. Act. During the assessment proceedings as well as the appellate proceedings the appellant had submitted that there were considerable increase in profit margin of appellant company this year, the directors are qualified and experienced. Similar arguments have been given in the case of related persons. Another argument given is that the business of the company is increased as a result of the service rendered by the directors and related persons. As far as the utility of director services to the appellant company and related persons is concerned I am not inclined to agree with the contentions of Id. A.R. that the remuneration to the directors and related persons be allowed keeping in view the increase in turnover and profitability of company. The huge increase in remuneration paid to the directors appears to be excessive and not commensurating to increase in the business and market conditions and in my considered view the same needs to be restricted as per the provisions of sec.40A(2) of the I.T. Act. Accordingly, the action of Id A.O. is upheld.
Similarly, in the case of related persons the Id A.O. has rightly disallowed the excess remuneration which has been explained by him in detailed manner as regards their qualification and the work experience. In certain cases even the graduates have also been given the same kind of remuneration which has been given to a chartered accountant or a person with MBA qualification. Apparently there has been no correlation between the steep hike in the remuneration of related persons and their work experience and qualification. The appellant has failed to produce any documentary evidence in support of the detailed work profile of the related persons. The appellant has also failed to furnish evidence with regard to their attendance in the appellant company. I am in agreement with the contention of assessing officer that with the steep increase in the remuneration of directors and the related persons appellant has devised an instrument to lower down tax implications, and this year after setting off of brought forward losses and depreciation, the profit margin would have been huge, in case this steep increase in remuneration could not take place. The appellant has failed badly to correlate the huge increase in remuneration and the contribution of the directors and related persons the profit earned by the appellant company. In the case of individuals the
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entire income is not taxable at highest margin in rate of tax, but in the case of company such income would have been taxable at the maximum marginal rate. Hence the appellant company has devised this instrument to lower down tax implications during that year.”
With the assistance of the ld.representativess, we have gone through the record carefully. It is pertinent to observe that in order to claim expenditure under section 37(1) of the Income Tax Act, the assessee requires to fulfill certain conditions viz. (a) there must be expenditure, (b) such expenditure must not be of the nature described in section 30 to 36, (c) expenditure must not be in the nature of capital expenditure, or personal expenditure of the assessee, and (d)expenditure must be laid out or expended wholly and exclusively for the purpose of the business. The expression “wholly” employed in section 37 refers to quantification of expenditure, while expression “exclusively” refers to motive, objects and purpose of the expenditure. In order to appraise ourselves as to how the concept of commercial expediency and business needs are to be appreciated while considering allowance or disallowance of the expenditure claimed by an assessee, we would like to make reference to the judgment of Hon’ble Gujarat High Court in the case of Voltamp Transformer P.Ltd., Vs. CIT, 129 ITR 105 (Guj) wherein it has held that –
“So far as the questions of commercial expediency and business need of an organization are concerned, it is not the view point of a revenue officer which should count, but it should be the view of an ordinary businessman dealing with a situation like the one faced by the assessee.”
In a similar circumstance, the Hon’ble Delhi High Court had an occasion to examine aspect of commercial expediency considered by a businessman while incurring any expenditure. The Hon’ble Delhi High Court has made the
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following observations on this aspect in the decision of the CIT Vs. Dalmia Cement Ltd., 254 ITR 377.
“An expenditure to which one cannot apply an empirical or subjective standard is to be judged from the point of view of a businessman and it is relevant to consider how the businessman himself treats a particular item of expenditure. The term "commercial expediency" is not a term of art. It means everything that serves to promote commerce and includes every means suitable to that end. In applying the test of commercial expediency, for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business the reasonableness of the expenditure has to be judged from the point of view of the businessman and not the Revenue (see CIT v. Walchand and Co. (P.) Ltd. ; J. K. Woollen Manufacturers v. CIT; Aluminium Corporation of India Ltd. v. CIT and CIT v. Panipat Woollen and General Mills Co. Ltd.”
In the light of the above, let us examine facts of the present case. Section 40A(2) has a direct bearing on the controversy, therefore, it is pertinent to take note of relevant part of section, which reads as under:
40A(2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of 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 of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction
….”
A bare perusal would indicate that provisions of section can be invoked mainly three situations; (a) of the expenditure is incurred is excessive or unreasonable considering fair market value, or (b) it is not incurred for the purpose of legitimate business need of the assessee, (c)
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it is excessive or unreasonable having regard to the benefits derived by the assessee. Sub-clause (b) of the section contemplates relationship of the persons to whom payment was made vis-à-vis the management of an assessee. In other words on account of their relationship with the management, they may not take undue advantage from the assessee. In other words, considering the payment made by an assessee to a particular person, who has an advantageous position on account of relationship with the assessee, then some undue advantage be not extended by the assessee to such person. That relationship has been explained in clause (b). Thus, in plain understanding, if an assessee availed service, goods or facilities from any person who falls within the ambit of sub-clause (b) of section 40A(2) and payment made to such related person is excessive in the understanding of the AO than the fair market value of such services, goods or facilities, then, excessive amount will not be allowed to an assessee as a deduction. The AO has to establish that services, goods and facilities availed by the assessee from such related party can be availed from the open market at a lesser price. Only then, he will disallow the claim of expenditure made by the assessee. If we apply this logic to the finding recorded by both the authorities, then it would reveal that both the authorities have miserably failed to demonstrate fair market value of services rendered by these related employees. Neither the AO nor the ld.CIT(A) had demonstrated anywhere that the person to whom salaries have been paid by the assessee could not command that salary in the open market or persons having more caliber could be employed at a lesser salary by the assessee. They have merely compared the payment of salary vis-à-vis turnover of the assessee as well as salary paid in earlier years. That is not the
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purpose of section 40A(2). Business needs have to be determined by the businessman and not by the Assessing Officer, and if it is appeared to the AO that a particular person could not fetch this much salary from the open market, only then he can disallow part of that salary.
During the course of hearing, it was brought to our notice that profit before taxes for the year has increased from Rs.95.90 lakhs to Rs.153.28 lakhs. The assessee had a jump in turnover by 62.9%. It was also contended that had the assessee was a partnership firm, it could give maximum remuneration to the partners upto 194.41 lakhs, whereas, it has paid remuneration to directors and other related parties to the extent of Rs.199.80 lakhs. The assessee has submitted this comparative status before the AO. A perusal of the finding recorded by the ld.CIT(A) would reveal that the ld.CIT(A) has observed that the assessee has failed to furnish evidence with regard to the attendance of the employees. It is pertinent to observe that salary has not been disallowed on this ground by the AO. He has not disbelieved the relationship of employees and employer. He has disbelieved that salary was paid in excessive. Similarly, the ld.CIT(A) has observed that the assessee failed to produce any documentary evidence in support of the details of work, profile of the related person. A perusal of the chart reproduced above, the assessee has disclosed their qualification, branch in which they are working. It was for the AO to carry out a study, whether similar employees are getting lesser salary in the market. Onus was not upon the assessee, rather it was for the Revenue to demonstrate that salary paid by the assessee is excessive. They have not provided any evidence in that regard. The AO has simply made a comparison between the
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salaries paid in earlier years vis-à-vis this year. But that cannot be sole criterion. Therefore, taking into consideration the facts and circumstances, we are satisfied that the AO failed to bring evidence on record to demonstrate the fact that the assessee has availed services of related persons at a higher price than the one which could be availed at a lower rate from the open market. We allow this ground of appeal and delete disallowance of Rs.1,50,73,321/-.
In the next ground of appeal, the assessee has pleaded that ld.CIT(A) has erred in confirming disallowance of Rs.1,20,000/-.
Brief facts of the case are that the assessee has advanced interest free loans aggregating to Rs.10 lakhs to two persons viz. Shri Uday D. Bhatt and Shri Nilesh D. Bhatt i.e. Rs.5 lakhs each. According to the AO, the assessee ought to have charged interest on such advances. He estimated the interest ought to have been charged by the assessee at the rate of 12% and worked out interest income ought to have been shown by the assessee at Rs.1,20,000/-. Since assessee has not charged interest, therefore, interest expenditure to this extent was disallowed. Appeal to the ld.CIT(A) did not bring any relief to the assessee.
With the assistance of ld.representatives, we have gone through the record carefully. The case of the AO is that interest bearing funds have been advanced by the assessee without charging interest, and therefore, user of interest bearing funds for non-business purpose, interest expenditure deserves to be disallowed on such advances. Before us, it has been contended that the assessee is having interest free funds to the extent of Rs.3,29,49,405/- which can take care of such interest free
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advance. In support of this, the assessee has made reference to the following decisions:
i) CIT Vs. Torrent Power Ltd., 363 ITR 474 (Guj) ii) CIT Vs. Suzlon Energy Ltd., 354 ITR 630 (Guj) iii) CIT Vs. Gujarat Power Corporation Ltd., 352 ITR 583 (Guj) iv) CIT Vs. Hitachi Home & Life Solutions (I) Ltd., 41 taxmann.com 540 (Guj) v) CIT Vs. Reliance utilities & Power Ltd., 313 ITR 340 (Bom) vi) Munjal Sales Corporation Vs. CIT, 298 ITR 298 (SC)
Since the assessee has more interest free funds with it than the one advanced by it, therefore, following the decision of Hon’ble Gujarat High Court in the case of CIT Vs. Gujarat Power Corporation (supra) and Reliance Utilities & Power Ltd. (supra), we are of the view that no disallowance out of interest expenditure deserves to be made. It has to be assumed that advances given by the assessee without charging interest came from interest free funds available with it. This ground is allowed and addition of Rs.1,20,000/- is deleted.
In the next ground, the grievance of the assessee is that the ld.CIT(A) has erred in confirming the disallowance of Rs.69,950/- with help of section 36(1)(va) of the Act.
The above amount has been disallowed by the AO on the ground that the assessee has made payment towards employees’ contribution to PF & ESI after expiry of limitation. On appeal, the ld.CIT(A) has confirmed the disallowance.
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Before us, it has been contended that such payments have been made within the grace period available under these Acts. The details have been given, as under: Particulars Month Amount Due date Actual payment PF Nov.10 Rs.58,622/- 15.12.10 16.12.10 ESI Nov.10 Rs.11,328 15.12.10 16.12.10
In support of its contentions, the ld.counsel for the assessee relied upon the decision of Hon’ble Gujarat High Court in the case of CIT Vs. Amoli Organics P.Ltd., 41 taxmann.com 149 (Guj). On the other hand, the ld.DR, supported order of the ld.CIT(A).
On due consideration of the above facts, we remit this issue to the file of AO to verify whether these payments have been made within the grace period or not. If these are made within the grace period, then case of the assessee falls within the ambit of the decision of Hon’ble Gujarat High Court, then allow the deduction, otherwise, the AO shall decide the issue in accordance with law.
In the result, appeal of the assessee is partly allowed for statistical purpose.
Pronounced in the Open Court on 1st February, 2019.
Sd/- Sd/- (WASEEM AHMED) (RAJPAL YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad; Dated, 01/02/2019