BESTO ELECTRONICS P.LTD,NEW DELHI vs. ACIT, CIRCLE-4(2), NEW DELHI

Per Anadee Nath Misshra, AM

(A) This appeal by Assessee is filed against the order of Learned Commissioner of Income Tax (Appeals)-2, New Delhi, [“Ld. CIT(A)”, for short], dated 13.11.2019 for Assessment Year 2013-14. Grounds taken in this appeal of Assessee are as under:

“1. That the Authorities below erred in disallowing Rs. 1,00,66,740 out of total interest paid with complete disregard to the fact that the assessee had itself added back Rs. 1,16,43,087/- out of the interest paid as per Profit & Loss Account and hence needs to be deleted.

ITA No.-254/Del/2020 Besto Electronics. 2. That in the absence of material on record to prove that the payment of enhanced remuneration to the whole time Director was excessive or unreasonable having regard to the fair market value of the service rendered the learned CIT(A) erred in sustaining the disallowance of Rs. 6,00,000 as made by the AO, which needs to be deleted.

(B) The return of income was filed on 30.09.2013 by the Assessee showing total

income of Rs. 66,03,420/-. Initial assessment order dated 18.01.2016 was passed by

the Assessing Officer (“AO’, for short) on 18.01.2016 making an addition of Rs. 39,950/-

on account of interest on TDS; thereby assessing the total income at Rs. 66,43,370/-.

Order under Section 263 of Income Tax Act (“I.T. Act”, for short) dated 28.03.2018 was

passed by Ld. Principal Commissioner of Income Tax, (“Ld. PCIT”, for short), directing

the AO to frame the assessment afresh. Fresh assessment order dated 03.12.2018 was

passed by the AO under Section 263/143(3) of I.T. Act wherein the assessee’s income

was assessed at Rs. 2,26,70,161/- (rounded off to 2,26,70,160/-). In the aforesaid

fresh assessment order dated 03.12.2018, additions amounting to Rs. 1,00,66,740/- (on

account of disallowance of interest on loan); Rs. 6 lakhs (on account of disallowance

out of Director’s Remuneration ) and Rs. 54 lakhs ( on account of disallowance of rent)

were made by the AO. The relevant portion of the Assessment Order is reproduced

below for ease of reference:

“6. Further vide notesheet entry dated 13.11.2018, the CA/AR of the assessee was asked to submit reply according to questionnaire dated 26.09.2018 alongwith documentary evidences. In response, neither anybody attended nor filed any written

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ITA No.-254/Del/2020 Besto Electronics. submission till date. The onus to prove genuineness of transactions is on assessee to substantiate its claim in return o income. But the assessee has failed to do the same. As the assessee has failed to substantiate its claim, the following disallowance /addition is being made:- (i) Interest on loan:- The assessee company has advance long term loan of Rs. 22,54,94,660/- to M/s Durga’s Global Hotel U.K. Rs. 24,44,560/- to Sikandra Auto India , Rs. 9,00,000/- to S.C. S.C. bloc and Rs. 9,98,570/- to Sushil Motors. The assessee has not charged any interest on these advances whereas the assessee has paid significant amount as interest on loans. Regarding these Advance/loans, the AR of the assessee company submitted that the assessee company is expected better returns in future from UK company and hence not charged any interest. For rest advance/loans, the AR activities, those are not materialized at all. The plea of the assessee company is not acceptable on the basis that on one hand the assessee company is paying interest on loan taken from others and on the other hand the assessee is not receiving interest income from the loan/advances giv ne to others. The justification submitted by the AR of the assessee company is not acceptable hence, interest on loan of Rs. 1,00,66,740/- debited in profit & loss account is hereby disallowed. (Disallowance of Rs. 1,00,66,740/-)

(ii) Director’s Remuneration:- The Assessee Company has increased remuneration of Mrs. Geetanjali Behl from Rs. 6,00,000/- during the year under consideration whereas there is downfall in business of the assessee company. The AR of the Assessee Company submitted that the remuneration is duly authorized by the Board Resolution. This plea of AR of the assessee company is not acceptable on the basis that even a Private Limited Company must have a credible and transparent policy in determining and accounting for the remuneration of the directors. Directors or Promoters of a Private Companies cannot simply divert the funds from corporate accounts to their personal accounts in the name of remuneration, to reduce the tax burdens or for any other reasons. Hence the remuneration of Rs. 6,00,000/- enhanced during the year under consideration is being disallowed and added to the income of the assessee company. (Disallowance of Rs. 6,00,000/-)

(iii) Rent Paid for property:_ The AR of the assessee submitted that the rented property was not utilized personally at all by the director’s. This plea of the assessee is not acceptable as the plea is contravening the terms and conditions of the lease deed. Para 1(b) of the Lease Deed Clearly state that the premises shall be exclusively used for the residential purpose of Mrs. Geetanjali Behl, Chairperson of the Lease Company. Accordingly the expenses of Rs. 54,00,000/- claimed by assessee company is disallowed as the expenditure is not incurred wholly and exclusively for the purpose of business.

(Disallowance of Rs. 54,00,000/-)

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ITA No.-254/Del/2020 Besto Electronics. 6.1 In view of the above, I have reasons to believe that the assessee has furnished inaccurate particulars of its income and therefore penalty proceedings u/s 271(1)(c) of the I.T. Act, 1961 are being initiated separately for furnishing inaccurate particulars of income mentioned at para 6 above.”

(C) The assessee filed an appeal before the Ld. CIT(A). Vide impugned appellate

order dated 13.11.2019, the Ld. CIT(A) dismissed assessee’s appeal, sustaining all the

aforesaid additions made by the AO in the aforesaid fresh Assessment Order dated

03.12.2018. The relevant portion of the aforesaid impugned appellate order dated

13.11.2019 is reproduced as under for ease of reference:

“6.1 Ground no.1:- This ground is directed against addition of Rs. 100,66,740/- u/s 36(l)(iii) on account of disallowance of interest as the appellant extended interest-free advances by diverting interest-bearing funds for non-business purposes. During the hearing of set aside case, the appellant submitted that the appellant is expected to get better returns in future and therefore, did not charge ’any interest from the party. As this justification does not have any merit, it was not accepted.

6.2 During the appellate proceedings, it is submitted that the appellant has already added back the entire interest amount of Rs. 1,16,83,520/- in computation of income as well as return of income. This submission was not made before the AO. The appellant has not clarified why the submission was not made before the AO. Further, it is not supported by any documentary evidence like return of income. Hence, this being an entirely new argument without any basis is rejected.

6.3 The appellant, at any stage, has not established the business nexus of interest-free advances. In view of this, I’m not inclined to interfere with the decision of the AO and the addition is confirmed. This ground is ruled against the appellant.

6.4 Ground no.2:- This ground is directed against addition of Rs.6,00,000/- on account of disallowance of remuneration paid to the director. The AO has noted that the director received remuneration of Rs.6,00,000/- in the earlier year which was increased to Rs. 12,00,000/- which is double the amount of remuneration in the earlier year. As against this phenomenon increase of remuneration, today is a downfall in the business. The appellant has not been able to establish the justification of this excessive payment whereas AO has noted that business is going down.

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ITA No.-254/Del/2020 Besto Electronics. 6.5 During the appellate proceedings, the appellant has agitated that the AO has not mentioned any section under which the disallowance was made. It also submitted that if the disallowance has been made u/s 40A(2), the AO had to determine a reasonable remuneration which was not done. However, it is observed that the AO has already allowed Rs. 6,00,000/- as remuneration and disallowed only the increased part of remuneration during the year.

6.6 No justification was given during the appellate proceedings for this phenomenal increase in the remuneration of the director. The logic of the AO appears justified that this is nothing but a ploy to divert the funds from corporate accounts to personal accounts in order to suppress the taxable income of the company. The addition is, therefore, sustained and the ground is ruled against the appellant.

6.7 Ground no.3:- This ground is directed against addition of Rs.54,00,000/- on account of disallowance of rental expenditure. The AO has noted that the lease deed for rented/leased property clearly shows that the premises were exclusively used by the director for residential purposes. However, the appellant had submitted that the property was not utilized personally by the director. As the documentary evidence goes against the submission of the appellant, the AO made addition accordingly.

6.8 During the appellate proceedings, it was agitated that the rent paid for residential accommodation of the director is a business expenditure. No legal justification or any judicial precedence has been relied on by the appellant in support of the claim. The submission is devoid of merit and is rejected. This ground is ruled against the appellant.”

(D) Assessee filed the present appeal in Income Tax Appellate Tribunal (“ITAT”, for

short) against the aforesaid impugned appellate order dated 03.12.2018 of Ld. CIT(A).

Vide order dated 06.03.2020 in S.A. No. 162/Del/2020, coordinate Bench of ITAT, Delhi

stayed the entire demand in the case of the assessee which resulted from the aforesaid

impugned appellate order dated 13.11.2019 of the Ld. CIT(A). In the appellate

proceedings in ITAT, the following papers were filed from the assessee’s side:

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ITA No.-254/Del/2020 Besto Electronics. (1) Paper book consisting of the following i. Copy of written submissions dated 05/11/2019 filed before CIT(Appeals) ii. Copy of Computation of Total income for A.Y. 2013-14 iii. Copy of Abstract of Profit & Loss and Finance charges for accounting year 2012- 13.

(2) Judicial Pronouncement:

i. Order dated 30 June, 2020 in the case of IKEA Trading (India) (P.) Ltd. vs. Deputy Commissioner of Income Tax, Circle 11(1) , New Delhi [2021] 123 taxmann.com 129 (Delhi-Trib.)

ii. Order dated 22.11.2019 passed by ITAT, Mumbai in the case of Acuity Holdings Pvt. Ltd. vs Dy. Commissioner of Income Tax in ITA No. 4011/Mum.2017

(E) First ground of appeal in the present appeal before us filed by the assessee is

regarding the aforesaid disallowance of Rs. 1,00,66,740/- on account of disallowance of

interest. At the time of hearing before us, the Ld. Counsel for assessee drew our

attention to computation of total income filed by the assessee alongwith return of

income; to show that the amount of interest of Rs. 1,16,43,087/- was suo-moto

disallowed by the assessee; and that the aforesaid amount of Rs. 1,00,66,740/-

disallowed by the AO was not even claimed by the assessee as an expenditure in the

return of income. The Ld. Counsel for assessee strongly contended that there was no

case for disallowance of Rs. 1,00,66,740/- when this amount was not even claimed

from the assessee’s side. The learned Senior Departmental Representative (“Ld. Sr.

DR”, for short) neither disputed this factual position, nor the contention made by the

Ld. Counsel for the assessee. However, she relied on the orders of the Ld. CIT(A) and

the AO. We find that there is no dispute on the fact that the aforesaid amount of Rs.

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ITA No.-254/Del/2020 Besto Electronics. 1,00,66,740/- disallowed by the AO, and sustained by the Ld. CIT(A), was not even

claimed by the assessee as an expenditure in the return of income. That being the

case, we agree with the contention of the Ld. Counsel for assessee that there was no

case for disallowance of the amount of Rs. 1,00,66,740 on account of interest

expenses. We direct the AO to delete this amount. Accordingly, first ground of appeal

is allowed.

(F) The third ground of appeal is regarding disallowance of rent paid, amounting to

Rs. 54,00,000/-. Relevant portions of the order of the AO and Ld. CIT(A) have already

been reproduced in foregoing paragraphs (B) and (C) of this order respectively. At the

time of hearing before us, the ld. Counsel for assessee drew our attention to order of

ITAT, Mumbai in the case of Acuity Holdings Pvt. Ltd. vs. DCIT in ITA No.

4011/Mum/2017. The Ld. Counsel for the assessee also relied on the submissions made before the Ld. CIT(A) in written submissions dated 05th November, 2019 which is

reproduced as below:

“6. Ground- of Appeal No. 3: The ground of appeal relates to disallowance of Rs.54,00,000 paid by the assesses Company for lease property taken on lease for the purpose of business of the assessee company.' During the course of the assessment proceedings the' AO, following the direction of learned C.I.T. sought reason why such expense may not be disallowed as the premises was “used by director, ” The assessee filed reply which is reproduced in the assessment order, but the AO being dissatisfied disallowed the rent paid holding that- the expenditure "is not incurred wholly and exclusively for the purpose of business. ”

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ITA No.-254/Del/2020 Besto Electronics. who works as a wholetime director is akin to any other employee rendering services to a company and rent paid for premises given to employees is for the purpose of business of the assessee. Further, section 30 of the Act provides for allowability of rent and section 38 of the Act for any apportionment thereof (if required). The disallowance u/s 37 of the Act is otherwise not sustain able as the said section will apply to instances, of expenses which are not covered in the specific provisions of section 30 to 36 of the Act, which is not the case-in present appeal. In the circumstances it is prayed that the disallowance be deleted and appeal allowed.”

(F.1) The Ld. Sr. DR relied on the orders of the Ld. CIT(A) and the AO.

(F.2) We have taken due cognizance of the submissions made by the assessee in the

appellate proceedings before the Ld. CIT(A). We have also considered the judicial

pronouncement and other materials brought to our attention. We have perused the

materials on record. We find that, it is the assessee’s case that director who works as

the whole time director is akin to any other employee rendering services to the

company and rent paid for premises given to employee is for the purposes of business

of the assessee. At paragraph 6.8 of her impugned appellate order, dated 13.11.2019

of Ld. CIT(A) she has noted the assessee’s contention that rent paid for residential

accommodation of the director is a business expenditure. However, on perusal of the

records we find that details of whether any tax was deducted at source by the assessee

on account of perquisite to the director by way of rent-free accommodation, within the

meaning of section 17(2) of Income Tax Act read with section 192 of Income Tax Act;

is not available on the records. Under Section 17(2) of Income Tax Act, rent free

accommodation provided by employer to an employee is the employees’ income under

the head ‘Salary’, being a perquisite. Further, Under Section 192 of I.T. Act, the

assessee was required to deduct tax at source in respect of salary payment made to the Page 8 of 13

ITA No.-254/Del/2020 Besto Electronics. employee. We find that the lower authorities - the AO as well as the Ld. CIT(A) - have

not examined this aspect; and the relevant facts are not available before us in the

records. The assessee has also made a reference to Section 38 of I.T. Act for

apportionment of expenses U/s 38 of I.T. Act. Under Section 38 of I.T. Act, a portion of

the expenses is allowable to the assessee as deduction, having regard to use of the

premises / building for the purposes of assessee’s business. We find that the lower

authorities – the AO as well as the Ld. CIT(A) - have not considered the applicability of

Section 38 of I.T. Act; and further, that the relevant facts are not available on the

records on the basis of which fair apportionment can be made. Moreover, neither the

assessee has furnished details for such apportionment; nor the lower authorities - the

AO as well as the Ld. CIT(A)-have considered apportionment of expenses U/s 38(1) of

I.T. Act. In view of these facts and circumstances, we are of the view that the relevant

facts for deciding this ground of appeal are not available on records of the Tribunal;

and that these relevant facts are needed to be brought on record. Therefore, we set

aside this issue to the file of the AO with the direction to pass a fresh order as per law

for deciding the issue regarding allowability of rent paid amounting to Rs. 54,00,000/-;

after providing the assessee a reasonable opportunity. For statistical purposes ground

3 is partly allowed.

(G) The second ground of appeal is regarding disallowance of Rs. 6 lakhs out of an

amount of Rs. 12 lakhs paid by the assessee towards director remuneration. This

disallowance was made by the AO, alleging that the amount of Rs. 6 lakhs was diverted

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ITA No.-254/Del/2020 Besto Electronics. from the corporate accounts (i.e from the accounts of the assessee) to the personal

accounts (i.e. remuneration paid to the directors), to reduce the tax burden or any

other reason. The Ld. CIT(A) has stated in her order that no justification was given

during the appellate proceedings for increase in the remuneration of the director. She

concluded that the logic of the AO, that this was nothing but a ploy, divert the funds

from corporate accounts to personal account in order to suppress the taxable income of

the company, appeared justified. At the time of hearing before us, the Ld. Counsel for

the assessee contended that the observation of the Ld. CIT(A), that no justification was

given during appellate proceeding, was factually incorrect. He drew our attention to

written submissions dated 05.11.2019 in which detailed submissions were made by the

assessee before Ld. CIT(A). The Ld. Counsel for assessee also relied on CBDT Circular

No. 6-P dated 6-7-1968 which states that no disallowance is to be made U/s 40A(2) in

respect of the payments made to relatives and sister concerns where there is no

attempt to evade tax-Whether since Assessing Officer had not brought any comparable

case to demonstrate that payments made by assessee were excessive /unreasonable

and fact that payees were also assessed to tax at same rate of tax, Commissioner

(Appeals) had rightly deleted addition. The Ld. Counsel for assessee contended that

the assessee company as well as the director to whom the remuneration was paid, both

were in the highest tax bracket; and paid tax at the highest rate. Therefore, there was

no case for any disallowance out of remuneration paid to the director. The Ld. Counsel

for assessee also relied on order of co-ordinate Bench of ITAT, Delhi in the case of IKEA

Trading (India)(P.)Ltd. vs. Deputy Commissioner of Income Tax [2012] 123

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ITA No.-254/Del/2020 Besto Electronics. taxmann.com 129 (Delhi-Trib.). The Ld. Sr. DR for Revenue relied on the orders of the

AO and the Ld. CIT(A). We have heard both sides. We have perused the materials on

record. We have considered the judicial pronouncement brought to our attention.

Although it has been contended by the Ld. Counsel for the assessee, for claiming

benefit of CBDT Circular dated 6-7-1968, that the assessee company as well as the

Director are both in the highest tax bracket; relevant papers to show the rate at which

the Director is taxed is not available on our records. Moreover, whether the assessee

has deducted tax at source under Section 192 of I.T. Act in respect of the disputed

amount of enhanced remuneration paid to the Director, is also not available on our

record. We find that the lower authorities, AO as well as Ld. CIT(A), have also not

examined these aspects; and have not brought relevant facts on record. Further, we

find that for the purposes of Section 40A(2) of I.T. Act, relevant facts pertaining to

enhanced remuneration paid to the Director, such as free market value, legitimate

needs of assessee’s business and benefit derived by / accruing to the assessee are not

available on the records. In view of the foregoing, we are of the view that the relevant

facts for deciding this ground of appeal are not available on records of the Tribunal;

and that these relevant facts are needed to be brought on record. Therefore, we set

aside this issue to the file of the AO with the direction to pass a fresh order as per law on the dispute under second ground of appeal. For statistical purposes, 2nd ground is

partly allowed.

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ITA No.-254/Del/2020 Besto Electronics. (H) In the result, appeal is partly allowed.

Order pronounced in open court on 28/01/2021.

Sd/- Sd/- (SUDHANSHU SRIVASTAVA) (ANADEE NATH MISSHRA) JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 28/01/2021 (Pooja)