MODULAR TANKS PVT. LTD.,,BARODA vs. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE-2(1)(2),, BARODA

PER WASEEM AHMED, ACCOUNTANT MEMBER :

Assessee is in appeal before the Tribunal against the order of the ld.CIT(A)-2, Vadodara dated 10.08.2016 passed for the assessment year 2013-14. 2. The assessee has filed revised grounds of appeal, detailed as under:

“1. The Learned CIT(A) has erred in confirming the addition of Rs.6,00,000/-being payment of salary to Mr. Shivender Chawla (Relative of Director) u/s 40A(2)(b) of the Act without appreciating the explanation provided. It is submitted that looking to the education qualification and experience in the both technical and marketing aspect that he has possessed.

ITA No.2733 /Ahd/2016 M/s. Modular Tanks Pvt. Ltd. vs. DCIT A.Y. 2013-14

Sr.No. Name of directors Amount Qualification

From the above, the AO noted that the qualifications of all the directors are same, but salary to a relative of the director viz. Mr.Shivendra Singh

ITA No.2733 /Ahd/2016 M/s. Modular Tanks Pvt. Ltd. vs. DCIT A.Y. 2013-14 Chawla has been paid excessive by Rs. 6 lakhs. Accordingly, the AO issued a show cause notice to the assessee for justifying salary paid to the relative of the Director. The assessee in compliance with it made written submissions, but the same was not substantiated by supporting evidence. Therefore, the AO treated the salary of Rs. 6 lakhs as excessive/unreasonable. Accordingly, the AO disallowed the same and added to the total income of the assessee.

i) Shri Shivender Singh Chawla relative of the director was looking after both technical as well as marketing activities of the assessee’s business; ii) Assessee furnished details of qualification and experience of Shri Shivnedra Singh Chawla as follows- a) Bachelor Degree in Mechanical Engineering from MS University, Vadodara; b) Master of Engineering from Cornel University, USA; c) Masters in Business Management from Cornell University, USA; d) Working experience of 35 years iii) The assessee also submitted that Shri Shivendra Singh Chawla has also paid tax at the maximum marginal rate. Therefore, there was no loss to the Revenue. Similarly, there could not any question of evasion of tax. The assessee in support of his claim filed the copy of ITR acknowledgment and computation of income;

ITA No.2733 /Ahd/2016 M/s. Modular Tanks Pvt. Ltd. vs. DCIT A.Y. 2013-14 In view of the above, the assessee submitted that Shri Shivendra Singh Chawla was paid a salary higher than other directors considering his rich experience both in technical and marketing aspects. Thus, he was paid for services rendered by him to the company.

However, the ld.CIT(A) disregarded contentions of the assessee and confirmed the order of the AO by observing as under:

“4. I have carefully considered the facts on records and submission of the Ld. Authorized Representative. Ground No. 1 pertains to disallowance of Rs.6,00,000/- out of salary/remuneration paid to Shri Shivindersingh C, Chawla, husband of Mrs. Harleen Chawla/ Director of the appellant company. The Assessing Officer noticed that the appellant has paid salary/remuneration to Shri D.B. Patell, Director at Rs.5,00,000/- and to Shri Rustom Patell, Director at Rs.5,00,000/- and hence salary to Shri Shivindersirigh C. Chawla cannot be more than Rs.5,00,000/-. In view of these facts, he disallowed excessive salary of Rs.6,00,000/- u/s. 40A(2)(b) of the Act. I find that both the Directors are qualified person and Shri Shivindersingh C. Chawla is also technically competent to render the services to the appellant company. The appellant has argued that the Directors were doing other business also, but Shri Shivindersingh C. Chawla was rendering services both in the technical as well as marketing areas. On perusal of copy of Return of Income of Shri Shivindersingh C. Chawla, it is noticed that he was also employee of Punjab Steel Rolling Mills Pvt. Ltd. and Reinhard Roto Machines during the year under consideration and earned salary of Rs.3,00,000/- and Rs.30,000/- respectively. Moreover, he was also carrying out separate business with Frontier Polymers Pvt. Ltd. and earned business income of Rs.6,00,000/-. From the above mentioned facts, thus it is crystal clear that Shri Shivindersingh C. Chawla was also rendering services at three more places in addition to the appellant company and hence the time devoted to the appellant company was not sufficient to earn salary more than the regular Directors of the appellant company. Accordingly, keeping in view the fair market value of the services rendered and business expediency, I hold that Shri Shivindersingh C. Chawla was not entitled to remuneration more than Rs.5,00,000/-. Accordingly, the excessive remuneration disallowed by the Assessing Officer at Rs.6,00,000/- u/s ITA No.2733 /Ahd/2016 M/s. Modular Tanks Pvt. Ltd. vs. DCIT A.Y. 2013-14 40A(2)(b) is justified and hence the same is confirmed. Thus, appellant fails in respect of Ground No. 1.”

Aggrieved, by order of the ld.CIT(A), the assessee is now before the Tribunal. The ld. AR before us filed paper book which is running from pages 1 to 43 and reiterated submissions as made before the ld.CIT(A).

The ld.AR further submitted that excess salary was paid to Shri Shivendra Singh Chawla in the assessment year 2015-16 in comparison with other directors, but the AO made no disallowance. The ld.AR in support of his claim filed a copy of the assessment order along with the return of income which is placed on record.

The ld.AR further submitted that the lower authorities had not doubted the service rendered by Shri Shivendra Singh Chawla.

On the other hand, the ld.DR submitted that the assessee is also drawing a salary from two other sister concerns and also running his business activity. Therefore, considering the availability of time of Shri Shivendra Singh Chawla, payment of the salary of Rs.11 lakh does not justify. The ld.DR vehemently supported orders of the authorities below.

ITA No.2733 /Ahd/2016 M/s. Modular Tanks Pvt. Ltd. vs. DCIT A.Y. 2013-14 At this juncture, we find relevant to refer to the provisions of section 40A(2)(b) of the Act, which reads as under:

“38 [Expenses or payments not deductible in certain circumstances. 39 40A. (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head “Profits and gains of business or profession”.

40 (2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person 41 referred to in clause (b) of this sub-section, and the 42 [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.”

From the reading of the above provisions, disallowance can be made under section 40A(2)(b) of the Act if it is found excessive and unreasonable in comparison to the prevailing market rate. In the case before us, the AO has not made such comparison justifying that salary paid to Shri Shivendra Singh Chawla was excessive in comparison to the market rate. The AO has made a comparison with existing directors of the company to whom a salary was paid of Rs.6 lakhs each per annum. As per the submissions of the assessee, Shri Shivendra Singh had rich experience of 35 years both in technical and marketing areas. The AO has not pointed out any defect in the submission of the assessee. In our considered view the AO before comparing the salary with other directors, should have also considered experience, qualification and technical competency, which has not been done in the instant case.

ITA No.2733 /Ahd/2016 M/s. Modular Tanks Pvt. Ltd. vs. DCIT A.Y. 2013-14 It is also the fact on record that the salary paid to Shri Shivendra Singh was taxed at the maximum marginal rate, meaning thereby both the assessee and Shri Shivendra Singh were being taxed at the same rate. Therefore, it can be concluded that there is no evasion of tax liability. We find that under similar circumstances Hon’ble Gujarat High Court in the case of PCIT Vs. Gujarat Gas Financial services limited reported in 60 taxmann.com 483 has held that if salary paid to the specified persons mentioned in section 40A(2)(b) of the Act and same is charged to tax at the maximum marginal rate, then no disallowance can be made. The relevant extract of the above judgment reads as under:

“13. As has been found by us in the preceding para of this judgment that the respondent company as well as the parent company, both are assessed to income tax at the maximum marginal rate and, therefore it cannot be said that the service charge is paid to the respondent company at a unreasonable rate to evade income tax. Even the learned Counsel Mr. Bhatt for the revenue does not dispute this fact.

We also note that the AO in the subsequent AY i.e., 2015-16, there was no disallowance of the salary paid to Shri Shivendra Singh in the ITA No.2733 /Ahd/2016 M/s. Modular Tanks Pvt. Ltd. vs. DCIT A.Y. 2013-14 assessment framed under section 143(3) of the Act. The details of the salary and assessment order are placed on record.

Having regard to the facts of the case in totality, we are inclined to set aside the order of the ld.CIT(A), and accordingly direct the AO to delete the addition made for Rs. 6 lakhs under section 40A(2)(b) of the Act. Hence, this ground of appeal of the assessee is allowed.

“4. 1. Ground No. 2 pertains to 50% disallowance of sales commission resulting Into n addition of Rs.6,16,727/-. Undisputedly, the appellant has paid commission to as many as 6 persons and also deducted the tax u/s. 194H. Since the Assessing Officer has disallowed only 50% of the commission, the genuineness of the services rendered doubted. On the basis of documentary evidence placed on record, I find that each commission agent has rendered services in respect of procuring purchased order/effecting sales to a specific party/project. The appellant has also furnished confirmation and copy of credit notes In order to justify the payment of commission. In its written submission, the appellant has claimed that the commission was paid at 12.10% of the turnover effected through the commission agent amounting to Rs.93,75,336/-.

ITA No.2733 /Ahd/2016 M/s. Modular Tanks Pvt. Ltd. vs. DCIT A.Y. 2013-14 On the basis of appellant's claim/ the amount of commission at 12.40% comes to Rs.11,34,416/- as against the claim of commission at Rs.12,33,454/-. Thus, it is clear that the appellant has claimed more commission by Rs.99,038/-, On perusal of the credit notes, it is noticed that the appellant has issued a credit note dated 18.09.2012 in favour of APT Samridhi Consultancy for commission of Rs.1,40,000/-. However, on the same credit notes the .appellant has deducted provisions of Rs.1,35,000/- from Rs.1,40,000/- and then shown commission of Rs.5,000/-. From this credit note, thus it emerges that claim of Rs. 1,35,000/- was made on the basis of provisions only. Since the provisions of expenses is not allowable as an expenditure unless the services are actually rendered, in my considered view, the disallowance of Rs.1,35,000/- requires to be made. Thus, considering the totality of facts and circumstances of the case as discussed above, I hold that the appellant has claimed excessive commission by Rs.1,35,000/- which also covers excessive commission 'worked out on the basis of rate of commission claimed by the appellant. Accordingly, the disallowance to the extent of Rs.1,35,000/- out of commission expenses is confirmed. The Assessing Officer is directed to allow consequential relief. Thus, appellant succeeds partly in respect of Ground No.2.”

Aggrieved by order of the ld.CIT(A) the assessee is in appeal before the Tribunal.

The ld.AR before us submitted that the ld.CIT(A) has misunderstood the facts by observing that the assessee has claimed commission of Rs.1,35,000/- by creating a provision for the year under consideration. In fact, a provision was created for Rs.1,35,000/- in the immediately preceding assessment year on account of commission expense which was allowed as a deduction in the earlier year only. However, the same was settled at Rs.1,40,000/- during the year. Thus, an excess commission of Rs.5,000/- was paid for the year under consideration which was claimed as a deduction in the year under consideration. The ld.AR in support of his claim drew our attention towards ledger account of sales commission which is placed at page number 16 of the paper book.

ITA No.2733 /Ahd/2016 M/s. Modular Tanks Pvt. Ltd. vs. DCIT A.Y. 2013-14 The ld.AR also drew our attention to the credit note dated 18.9.2012 for the payment of commission to the party for Rs.1,40,000/- which is placed at page no.18 of the paper book.

On the other hand, the ld.DR vehemently supported the order of the authorities below.

Therefore the same was disallowed.

From the preceding discussion, we note that the assessee has created the provisions for commission expense in the earlier years as evident from the copy of ledger available on page no.16 of the paper book. However, the accounts were settled with the party at Rs.1,40,000/- during the year under consideration. Therefore the excess sum of Rs. 5,000/- was claimed as commission expenses for the year under consideration. On perusal of the ledger account of the commission, there remains no ambiguity that the provision for commission expenses of Rs.1,35,000/- was not claimed as a deduction in the year under consideration as alleged by the ld.CIT(A). Once the expenses of Rs.1,35,000/- has not claimed in the books of accounts, then there is no question making

ITA No.2733 /Ahd/2016 M/s. Modular Tanks Pvt. Ltd. vs. DCIT A.Y. 2013-14 disallowance of such expenses. Therefore, we hold that the ld.CIT(A) has misunderstood the facts of the case and made disallowance of Rs.1,35,000/- treating the same as provision for commission expenses. Therefore, we have no hesitation in reversing the order of the ld.CIT(A), and accordingly direct the AO to delete the same. This ground of appeal of the assessee is allowed.

Particulars Amount Rs. Paid in cash Travelling – Director 4,91,508 1,01,434 Travelling – others 1,09,862 707 Travelling – expenses 6,42,769 5,62,261 Travelling – marketing 35,050 35,050 Total 12,79,189 6,99,452

“From the above details, it is clear that the appellant has paid the cash amounting to Rs.6,99,452/- to various persons on the ground that travelling

ITA No.2733 /Ahd/2016 M/s. Modular Tanks Pvt. Ltd. vs. DCIT A.Y. 2013-14 expenses were incurred. Such cash expenses are not supported by any third party documentary evidences since only self made vouchers have been prepared. Therefore, genuineness of the cash expenses has not been fully established by the appellant. These facts and circumstances also leave scope for claim of personal expenses. In view of these facts, I am of the considered view that a part disallowance out of travelling expenses Is certainly warranted. Accordingly, disallowance of 25% of the total travelling expenses resulting into an addition of Rs.3,19,797/- is quite reasonable and justified. Thus, the disallowance made by the Assessing Officer is confirmed and Ground No.3 is dismissed.”

Being aggrieved by order of the ld.CIT(A), the assessee is in appeal before the Tribunal.

Before us, the ld. counsel for the assessee submitted that the assessee being a body corporate was subject to audit under the Income Tax vis-à- vis Companies Act. There was no defect pointed out by the auditor of the company. The ld.AR further submitted that all the traveling expenses were incurred in connection with the business of the assessee. The ld.AR in support of his claim drew our attention on the ledger of traveling expenses which are placed on page no. 21 to 43 of the paper book.

On the other hand, the ld. DR submitted that there was no third party document in support of traveling expenses claimed by the assessee. Therefore, it was not possible to verify the authenticity of the expenses. Accordingly, business exigency was not established. The ld. DR vehemently supported orders of the authorities below.

ITA No.2733 /Ahd/2016 M/s. Modular Tanks Pvt. Ltd. vs. DCIT A.Y. 2013-14 as well as on the ground that there was no third party supporting evidence for traveling expenses. Therefore, the AO disallowed the same to the tune of 25% of traveling expenses which was confirmed by the ld. CIT(A).

From the preceding discussion, we note that the assessee has declared total turnover of Rs.3,58,73,194/- against which travelling expenses of Rs.12,79,189/- was claimed which works out to be 3.5% of the total turnover. Considering the nature of the business, we note that the assessee is supplying water tanks to various parties located in different areas. The assessee subsequently after supplying water tank is also providing installation services. Any of the lower authorities have not disputed this fact in their order.

We also note that the accounts of the assessee were duly audited. The amount of such expenses claimed by the assessee are reasonable in comparison to the volume of the business of the assessee as there is no allegation from the Assessing Officer that the expenses claimed by the assessee are unreasonable or excessive. We also observe that external documents in such kind of expenses are not normally available.

Therefore in the absence of external evidence the expenses cannot be disallowed. Accordingly, we are not inclined to uphold the order of Ld. CIT(A).

In view of above, it is clear that the AO has not pointed out any specific defects in the expenses claimed by the assessee. In these circumstances, we are of the view that the estimated disallowance is not sustainable in ITA No.2733 /Ahd/2016 M/s. Modular Tanks Pvt. Ltd. vs. DCIT A.Y. 2013-14 the eyes of the law. In this connection, we also rely on the order of Co- ordinate Bench of ITAT Kolkata in the case of Animesh Sadhu Vs. ACIT in ITA 11/Kol/2013 Dated 12.11.2014. The relevant extract is reproduced below.:- “8. We have considered the rival submissions. A perusal of the assessment order shows that the Assessing Officer has disallowed 20% of the expenses on estimate basis on the ground that no independent verification to be made to find out the authenticity of the expenses. Ld. CIT(Appeals) has reduced the same on the same ground. However, we are of the view that no estimated disallowance scan be made for inability to make independent verification. If any specific expenditure is unverifiable or is un-vouched, then such specific expenditure is disallowable. Her no such specific identification has been done. In these circumstances, we are of the view that the estimated disallowance as confirmed by the ld. CIT(Appeals) is unsustainable. Consequently the same stands deleted. In the result, Grounds No. 2 & 3 of the assessee’s appeal stand allowed.”

Respectfully, following the order of the Co-ordinate Bench (supra) and considering all the facts in totality, we delete the addition made by the lower authorities. Hence, this ground of appeal of the assessee is allowed.

Ahmedabad; Dated, 04/09/2018

ITA No.2733 /Ahd/2016 M/s. Modular Tanks Pvt. Ltd. vs. DCIT A.Y. 2013-14 आदेश क" ""त"ल"प अ"े"षत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant