COMMISSIONER OF INCOME TAX vs. EXPO MECANIQUE MARKETING PVT LTD

IN THE HIGH COURT OF DELHI AT NEW DELHI 06. ITA 1154/2010 . COMMISSIONER OF INCOME TAX ..... Appellant Through Mr. Sanjeev Sabharwal, Adv. . versus . EXPO MECANIQUE MARKETING PVT LTD ..... Respondent Through Mr. S. Krishnan, Adv. . CORAM: HON'BLE THE CHIEF JUSTICE HON'BLE MR. JUSTICE MANMOHAN . O R D E R 17.08.2010 . The present appeal preferred under Section 260A of the Income Tax Act, 1961 (for short ?the Act?) is directed against the order dated 28th August, 2009 passed by the Income Tax Appellant Tribunal, Delhi Bench ?B?, New Delhi (?the tribunal?) in I.T.A. No.3795/Del/2008 pertaining to the assessment year 2005-06. . . Mr. Sanjeev Sabharwal, learned counsel for the revenue, has submitted that the following question of law arises for consideration in this appeal:- ?Whether ITAT erred in deleting the disallowance of Rs.69 lakhs under the head ?salary? under section 40A(2)(B) of the Act? . ITA 1154/2010 page 1 of 5 Mr. S. Krishnan, learned counsel appearing for the assessee, submitted that the said question does not give rise to any question of law at all and to put it in the compartment of substantial question of law is unacceptable. To appreciate the submission raised at the bar, it is apposite to note few facts which are essential for adjudication of the issue raised in this appeal. The assessee-respondent paid salary amounting to Rs.69 lakhs to its directors, namely, Ravi Gupta, Deepika Gupta and Sanjay Gupta. It was submitted before the assessing officer that the said amount was paid towards salary regard being had to the contribution made by the directors and keeping in view the market concept and the decision of the company was in the realm of acceptable prudence. The contention raised by the assessee was not accepted by the assessing officer as he was of the opinion that the assessee had not been able to give adequate reason for the huge increase in the salary. Be it noted, the salary was increased in respect of the aforesaid three directors than what was paid to the earlier directors. However, the assessing officer accepted the stand that a sum of Rs.30 lakhs could be accepted regard being had to the enhancement of the turnover of the company. It is worth ITA 1154/2010 page 2 of 5 . noting that the assessing officer had applied the underlined principle engrafted under Section 40A(2) of the Act. In the ultimate eventuate, Rs.42 lakhs was disallowed under Section 40(A)(2) of the Act. Being dissatisfied with the order passed by the assessing officer, an appeal was preferred before the CIT(A) who concurred with the assessing officer and dismissed the appeal preferred by the assessee. Aggrieved by the aforesaid order of the first appellate authority, the assessee preferred the appeal before the tribunal. The tribunal took note of the decisions rendered in Shahzada Nand and Sons v. CIT, 108 ITR 358(SC), Voltamp Transformers P. Ltd. v. CIT, 129 ITR 105 (Gujarat) and CIT v. Shri Ram Pistons and Rings Ltd., 181 ITR 230 (Delhi) and came to hold that the payment to a director depends on his experience and educational qualification and the payment of salary cannot be valued as in the case of goods and services. The tribunal further opined that the payment of salary is payable according to the legitimate business need of the assessee. The tribunal also took note of the fact that there has been no objection by the Company Law Board and because of the aforesaid reasoning, the tribunal dislodged the order of the CIT(A) and allowed the claim of the assessee in toto. ITA 1154/2010 page 3 of 5 . Mr. Sanjeev Sabharwal, learned counsel for the revenue, questioning the legal propriety of the order of the tribunal, has contended that the tribunal has committed illegality by placing reliance on the decision in Shri Ram Pistons and Rings (supra) of this Court wherein certificates were filed from the Company Law Board as regards the salary of the directors which was not the case in hand and, therefore, the comparison could not have been drawn by the tribunal. The learned counsel further submitted that the tribunal has erred in its interpretation of 40A(2)(a) of the Act. . . Mr. S. Krishnan, learned counsel appearing for the assessee, submitted that the object and reasons behind Section 40A(2) was to avoid tax evasion but not to curtail the salary component. It is also urged by him that unless the expenditure is excessive or unreasonable, the Courts should not interfere as that would not give rise to substantial question of law. He has commended us to the decisions in Upper India Publishing House P. Ltd. v. Commissioner of Income- tax, (1979) 117 ITR 569(SC), Commissioner of Income-tax v. Northern India Iron and Steel Co. Ltd., (1989) 179 ITR 599(Delhi) and Commissioner of Income-tax v. Mohta Electrosteel Ltd., (1995) 215 ITR 522(Delhi). On a perusal of the aforesaid decisions, the principle that emanates is that the payment of salary to a ITA 1154/2010 page 4 of 5 . director, whether reasonable or not, would be in the realm of facts. To elaborate, the line of authority that has been brought to our notice has laid emphasis on the concept of reasonability. Apart from the above, it is submitted by Mr. Krishnan that the directors have been assessed to income-tax on the sum received from the assessee company and have paid more tax than is payable by the individual assessee. To appreciate the controversy, we have carefully perused the order passed by the assessing officer, the CIT(A) and the tribunal. The tribunal in paragraph 6 has analyzed the facts in entirety and has recorded a finding that the salary which was paid to the three directors was on the basis of legitimate foundation and the needs of the assessee. The tribunal has recorded that the same was neither unreasonable nor excessive. In our considered opinion, the said conclusion is arrived at on the touchstone of the pronouncements in the field. In view of the aforesaid, we hold that no question of law emerges and, accordingly, the appeal, being devoid of merit, stands dismissed without any order as to costs. CHIEF JUSTICE . . . MANMOHAN, J AUGUST 17, 2010/vk ITA 1154/2010 page 5 of 5 .