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Income Tax Appellate Tribunal, “A” BENCH, PUNE
Before: SHRI ANIL CHATURVEDI, AM & SHRI PARTHA SARATHI CHAUDHURY, JM
आदेश / ORDER
PER PARTHA SARATHI CHAUDHURY, JM :
This appeal preferred by Revenue emanates from the order of the Ld. CIT(Appeals)-2, Aurangabad dated 16.01.2017 for assessment year 2012-13 as per following grounds of appeal:
“1. On the facts and in circumstances of the case, Ld. CIT(A)-2, Aurangabad has erred in deleting the addition of Rs.1,52,00,000/- made by the AO in the assessment order. 2. On the facts and in the circumstances of the case, the order of Ld. CIT(A) may be canceled and the order of the AO may be restored.
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The appellant craves leave to add, alter, modify, delete and amend any of the grounds as per circumstances of the case. 4. The appellant prays leave to adduce such further evidence to substantiate its case as the occasion may demand.”
The brief facts in this case are that the assessee, a Private Limited
Company assessed in the status of a company had filed the return of income
for the assessment year 2012-13 on 28.09.2012 declaring total income at Rs.
Nil. The case was selected for scrutiny under CASS and accordingly, notice
u/s. 143(2) was issued on 07.08.2013 which was duly served upon the
assessee. The case was assessed u/s.143(3) of the Act on 31.03.2015 after
duly hearing the Ld.A.R. of the assessee. During the course of assessment
proceedings, the Assessing Officer noted that the assessee had made a
payment of Rs.1,85,00,000/- to the Directors of the Company. Since, in the
immediately preceding previous year an addition of Rs.1,51,50,000/- had
been made u/s.40A(2)(b) of the Income Tax Act, 1961 (hereinafter referred to
as ‘the Act’), the Assessing Officer added the sum of Rs.1,52,00,000/- to the
total income of the assessee.
When the matter travelled upto the Ld. CIT(Appeals), he deleted the
addition made by the Assessing Officer u/s.40A(2)(b) of the Act as per details
reasons and grounds as appearing in his order which is on record.
The Ld. AR of the assessee at the time of hearing appraised the Bench
at Para 7 of the assessment order wherein the Assessing Officer has made the
said addition following the order of assessment year 2011-12 and relevant
part is as under:
“7.During the year under assessment, the assessee Company has paid remuneration to the Directors to the tune of Rs.1,85,00,000/-. This issue was subject matter of scrutiny for the immediately proceedings year and
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an addition of Rs.1,51,50,000/- was disallowed and added to the total income of the assessee u/s.42(a)(b) of the Income Tax Act, 1961. This issue has been discussed at length in the body of the assessment order by the AO who has framed the assessment. However, the same issue is sub- judice before the learned CIT(A), and appeal decision is yet awaited.”
The Ld. AR of the assessee further placed reliance on the decision of
Co-ordinate Bench of the Tribunal, Pune in the case of DCIT Vs. M/s. Indo
Enterprises, in ITA No.1221/PUN/2016 for assessment year 2011-12 wherein
identical facts and similar issue was decided in favour of the assessee.
On the other hand, the Ld. DR has placed reliance on the order of the
Assessing Officer.
We have perused the case record and considered the judicial
pronouncements placed before us. We find that the Co-ordinate Bench of the
Tribunal, Pune in ITA No. 1221/PUN/2016 has upheld the decision of the Ld.
CIT(Appeals) on the issue and had sustained the relief granted to the
assessee. The relevant portion of the decision is as under:
“5. Ground No.1 raised by the Revenue relates to the addition on account of disallowance u/s.40A(2)(b) of the Act relating to remuneration paid to the Directors. Relevant facts are already discussed in the preceding paragraphs of this order. AO resorted to adhoc disallowance and held payment of remuneration @ Rs.1 lakh per month per Director is reasonable. AO did not indicate the reasons for fixing the remuneration of the Directors @ Rs.1 lakh per month. He has not brought any market information/comparable instances in this regard. AO merely relied on his own estimations unsupported by independent information/evidences for making disallowance of Rs.1,51,50,000/-. CIT(A) discussed this issue at length and held the ‘onus’ is on the AO in matters relating to invoking of provisions of section 40A(2)(b) of the Act on mentioned that the assessee discharged the primary onus. CIT(A) held that the AO should have made use of the said information furnished by the assessee and conduced market enquiries before quantifying the allowable remuneration to the Directors based on the scientific data or market data or comparable cases etc. AO has not done any of such exercise. He merely disallowed resorting to adhocism. Therefore, the CIT(A) did not approve the addition made by the AO and relied on the jurisdictional High Court judgment in the case of M/s. Indo Saudi Services Travel Private Limited (supra). CIT(A) also did not entertain the adhoc disallowance made by the AO and described it as arbitrary and unsupported by any evidences. CIT(A) analysed the provisions of section 40A(2)(b) of the Act and referred to various decision in Para Nos. 10 to 12 and held against the Revenue. In
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this regard, we perused the relevant order of CIT(A) and find it relevant to extract the same. The said finding given in Para Nos. 13 to 15 of his order reads as under :
“13. I have considered the submission made by the appellant and the observations of the A.O. The disallowance made by the A.O. u/s.40A(2)(b) is based on conjectures and surmises. He has simply disbelieved that the directors of the company would be rendering any sort of service to the assessee company. On the contrary the assessee has been able to demonstrate that specific as well as general functions were being performed by the directors which were in the interest of the long-term goals of the assessee company. Disallowance u/s.40A(2)(b) by saying that the directors could not have performed the services is not correct. Various courts have held that the AO cannot dictate to the assessee as to how the business should be done. Hon'ble ITAT in the case of Binit Corpn. v. ITO [1986] 25 Taxman 238 (Ahd.)(Mag.) has after considering various judicial pronouncement stated that first of all the AO has to satisfy himself whether the expenditure itself is genuine or not and if it is genuine then for the purpose of finding out the portion of disallowance he shall have to find out the fair market value of the services and this would presuppose that services are commonly available for which market value can be known. Thereafter, the AO shall have to evaluate the legitimate needs of the business at a point of time when the services were rendered and this would involve in inquiry as a businessman because in times of dire need services are obtained even at higher cost, the ultimate aim being to earn profit or to maintain the business relations. According to the ITAT, the AO shall have to find out what benefit is derived by the assessee and this would not necessarily confine to the year in question but shall have to take overall picture depending upon the facts of each case. Even the benefit accruing to the assessee shall have to be evaluated. This again may not be confirmed to the period of accounting year only and again it would not be essential that benefit must be in the revenue field. Thereafter according to the ITAT the AO shall have to give reasonable opportunity to the assessee to rebut his finding. If comparable instances of other parties are not available at least compare with earlier year, ad-hoc disallowance cannot stand the test of appeal.
The provisions of Section 40A(2)(b) are to be applied when the AO is of the opinion that an expenditure is excessive or unreasonable having regard to the fair market value of the services for which the payment is made. In the present case, the only reason for the impugned addition was an out in the mind of the assessing officer that it will not be possible for the directors to devote any time towards the working of the assessee company. The assessing officer has also doubted the contribution of Smt.Vaishali V. Deshmukh towards the working of the company on the ground that she is a housewife. The assessing officer has done nothing and has not confronted any of the directors to clear his doubts that they have not rendered any service in the functioning of the assessee company. But before arriving to a conclusion that the payment was excessive, the AO was expected to place on record the reason for holding such opinion. It is noted that no such comparable instance was quoted by the AO. It has also been brought to my notice that all the assessee's are in the highest tax bracket and hence there could not have been any intention to save the tax. As stated in Circular No.6-P, dated
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06/07/1968, the objective behind introduction of this section is to prevent evasion of tax. If it cannot be demonstrated that there has been any evasion of tax due to such remunerations being paid, there cannot be a cause for any disallowance. It has been held in the case of Indo Saudi Services (supra) by the Honourable Bombay High Court as under: "(v) Under the CEDT Circular number 6-P dt. 6th July, 1968 it is stated that no disallowance is to be made in the s.40A(2) in respect of payments made to the relatives and sister concerns when there is no attempt to evade tax. 5. In view of the aforesaid admitted facts we are of the view that the Tribunal was correct in coming to the conclusion that the CIT(A) was wrong in disallowing half percent commission paid to the sister concern of the assessee during the asstt. yrs. 1991-92 and 1992-93. The learned advocate appearing for the appellant was also not in a position to point out how the assessee evaded payment of tax by alleged payment of higher commission to its sister concern since the sister concern was also paying tax at higher rate and copies of the assessment orders of the sister concern were taken on record by the Tribunal." 15. Thus, the totality of the circumstances demonstrates that there was no justification on the part of the AO to make such an ad hoc addition. Resultantly, I delete the addition made by the assessing officer U/s.40A(2b).” From the above, it is clear that the CIT(A) has followed the settled law of the land qua the provisions of section 40A(2)(b) of the Act and deleted the addition. The reasoning given by the CIT(A), in our view, is on sound footing and, therefore, the same is sustainable. Accordingly, Ground No.1 raised by the Revenue stands dismissed.”
Respectfully, following the aforesaid decision, we sustain the relief
provided to the assessee by the Ld. CIT(Appeals). Hence, grounds of appeal
raised by Revenue are dismissed.
In the result, appeal of the Revenue is dismissed. 7.
Order pronounced on 11th day of January, 2019.
Sd/- Sd/- ANIL CHATURVEDI PARTHA SARATHI CHAUDHURY ACCOUNTANT MEMBER JUDICIAL MEMBER
पुणे / Pune; �दनांक / Dated : 11th January, 2019. SB
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आदेश क� ��त�ल�प अ�े�षत / Copy of the Order forwarded to :
अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The CIT(Appeals)-2, Aurangabad. 4. The Pr. CIT-2, Aurangabad. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, “ए” ब�च, 5. पुणे / DR, ITAT, “A” Bench, Pune. गाड� फ़ाइल / Guard File. 6.
// True Copy // आदेशानुसार / BY ORDER,
�नजी स�चव / Private Secretary आयकर अपील�य अ�धकरण, पुणे / ITAT, Pune.
7 ITA No.1014/PUN/2017 A.Y.2012-13
Date 1 Draft dictated on 09.01.2019 Sr.PS/PS 2 Draft placed before author 10.01.2019 Sr.PS/PS 3 Draft proposed and placed JM/AM before the second Member 4 Draft discussed/approved by AM/JM second Member 5 Approved draft comes to the Sr.PS/PS Sr. PS/PS 6 Kept for pronouncement on Sr.PS/PS 7 Date of uploading of order Sr.PS/PS 8 File sent to Bench Clerk Sr.PS/PS 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R 11 Date of dispatch of order