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Income Tax Appellate Tribunal, AHMEDABAD “B” BENCH AHMEDABAD
ITA Nos. 3158 & 3340/Ahd/15 [Patel Alloy Steel Pvt. Ltd.] - 2 - AY: 2012-13
PER S. S. GODARA, JUDICIAL MEMBER
The assessee and Revenue have filed their instant cross appeals for assessment year 2012-13 against the CIT(A)-7, Ahmedabad’s order dated 15.09.2015, in case no. CIT(A)-7/549/15-16, in proceedings u/s. 143(3) of the Income Tax Act, 1961; in short “the Act”. Heard both sides. Case files perused.
We come to assessee’s appeal ITA No.3158/Ahd/2015. It raises two substantive grounds therein. The first one seeks to reverse both the lower authorities’ action invoking Section 14A r.w. Rule 8D disallowance of Rs.3,18,172/-. We notice at the outset that both the lower authorities follow their respective findings right from assessment year 2008-09 to 2011-12 in order to compute the impugned disallowance under the newly introduced computation provision i.e. Rule 8D of the Income Tax Rules. Case records reveal that the assessee’s appeals against the said corresponding disallowance stand accepted on 08.04.2016 and 14.09.2017. It has come on record that the said co-ordinate benches have deleted identical disallowances in earlier assessment years. We therefore follow consistency to delete the impugned disallowance for want of an appropriate satisfaction u/s.14A(2) of the Act. The assessee’s former substantive ground succeeds.
The assessee’s second substantive ground as well as Revenue’s first substantive grievance arises against the CIT(A)’s findings affirming Section 40(A)(2)(b) disallowance of Rs.4,18,05,272/- as upheld to the tune of Rs.1,56,81,564/- in lower appellate proceedings as follows:
“5.2 I have considered the assessment order and the submissions made by the appellant. The AO noted that during the year under consideration, the MD of the appellant company Shri K.H. Javeri received remuneration amounting to Rs.4,52,51,059/- and the Executive Director Shri Abhishek K. Javeri received Rs.1,62,94,505/- as remuneration. It has been noted by the AO that there was five-fold increase in remuneration to Shri K.H. Javeri over 7 to 8 years and an increase of 36 times to Shri Abhishek K. Javeri in a period of 5 to 6 years. A perusal of the submission made by the appellant shows that the appellant has reiterated the submissions made during the assessment proceedings that the
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increase in remuneration was decided by the Board of Directors. The appellant has not made out any case or submitted any evidence to show that there was any improvement or alteration in the services rendered by the directors towards the company. There has not been any substantial increase in the turnover of the company during the year under consideration either.
It is seen that the A.O has disallowed directors' remuneration as per the provisions of sec.40A(2) of the I.T. Act. The provisions of sec.40A start with non obstante clause and have overriding effect over the provisions of any other section of Income-tax Act, 1961. The Hon'ble Gujarat High court in CIT vs Bharat Vijay Mills Ltd. (1988) 128 ITR 633 (Guj.) has held that provisions of sec.40A have been declared to be of an overriding nature. The non obstante clause at the beginning of sec.40A(l) clearly indicates that if any other provisions exist somewhere on the statute book, they have to give way to clear the express provisions of Section 40A.
5.2.1 In view of the overriding provisions of sec.40A(2)(a), the payment of remuneration may be authorized by the deed of partnership, may also be in accordance with the terms of deed, and may further be within the ceiling limit as fixed by cl.v of section 40(b), in respect of aggregate amount of remuneration payable to the partners. If the amount of remuneration paid to a particular partner(or partners) is excessive or unreasonable or, looking to the legitimate needs to the business of the assessee firm or the benefit derived by the firm, the same is unfair, the A.O. may allow a remuneration only to the extent it is reasonable and not excessive in his opinion.
5.2.2 The above discussion clearly shows that the excessive directors remuneration 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 has submitted that the directors remuneration is approved by Board of Directors, that the directors are qualified engineers and the business of the company is increased as a result of the service rendered by the directors. As far as reliance placed on the board of director's resolution is concerned, I am not inclined to agree with the same as the resolution of board of directors is an internal matter and meeting of board of directors is dominated and controlled by Shri K.H. Jhaveri and Shri Abhishek K. Jhaveri. As far as the utility of directors' services to the appellant company, I am inclined to agree with the contentions of the appellant that the remuneration to the directors be allowed keeping in view the increase in turnover and profitability of company. However, a perusal of the submissions made by the appellant shows that the appellant has not made out any case or submitted any evidence to show that there was any improvement or alteration in the services rendered by the directors towards the company. There has not been any substantial increase in the turnover of the company during the year under consideration either. However, the remuneration paid to the directors appears to be excessive and in my considered view, the same needs to be restricted as per the provisions of sec.40A(2) of the IT. Act.
5.2.3 This issue has been decided consistently by my predecessors as well in Asst. Years 2008-09, 2009-10, 2010-11 and 2011-12. In the earlier year i.e. Asst. Year 2011-12, remuneration of Rs.4,40,64,000/- has been allowed to Shri K.H.
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Javeri. Considering the fact that there has been no substantial increase in turnover during the current year and the appellant has not given details of any change or improvement in the nature of services rendered by the directors, the remuneration is allowed to the extent of Rs.4,40,64,000/-and balance disallowance to the extent of Rs.11,87,059/- is confirmed. 5.2.4 As regards disallowance of remuneration paid to Shri Abhishek K. Javeri, for similar reasons as discussed above, I am of the view that the remuneration paid to him is excessive. It is seen that Shri Abhishek Jhaveri was paid a salary of Rs.18,00,000/- in the year 2005-06, which increased to Rs.1,62,94,505/- in the current year. In my considered view there is no justification for increase in directors remuneration in the case of Shri Abhishek K. Jhaveri, due to reasons discussed in detail in the para above. Thus Director's remuneration to the extent of Rs.4,58,64,000/- (Rs.4,40,64,000/- + Rs. 18,00,000/-) is allowed. Disallowance made to the extent of Rs. 1,56,81,564/- (Rs.11,87,059/- + Rs.1,44,94,505/-) is confirmed. This ground of appeal is partly allowed.”
We have heard rival contentions. There is hardly any denial of the fact that the CIT(A) has followed his predecessors’ orders for assessment years 2008-09 to 2011-12. We notice in this factual backdrop that the above co-ordinate bench’s order (supra) has reversed the CIT(A)’s findings under challenge therein in partly affirming Assessing Officer’s identical action; although involving different amounts paid as remuneration to assessee’s Directors and other specified parties. Learned Departmental Representative is fair enough in not drawing any distinction on facts as well as law. We thus accept assessee’s latter substantive ground as well as its main appeal ITA No. 3158/Ahd/2015.
The Revenue’s substantive ground on the other hand seeking to revive the entire disallowance is rejected accordingly.
This leaves us with Revenue’s latter substantive ground seeking to revive closing stock addition of Rs.1,38,38,690/- as made by the Assessing Officer u/s.145A of the Act and deleted in course of lower appellate proceedings as follows:
“6.2 I have considered the assessment order and the submissions made by the appellant. A perusal of the submissions made by the appellant shows that the appellant is following exclusive method of accounting. According to this method of accounting payment and receipt of CENVAT is a balance sheet item and it is not debited or credited in the P & L A/c. In this regard, I am inclined to agree with the contention of the ld. A.R. that the amount of Rs.1,38,38,690/- being
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CENVAT paid on raw material is revenue neutral. In this regard, the appellant has rightly placed reliance on Indo Nippon Chemical Co. Ltd. (2003] 261 ITR 275 (SC). I have also perused the other case laws relied upon by the appellant and ratios of these case laws also support the case of the appellant. Further, it is seen that the A.O. has not commented on the accounting policies followed by the appellant. The policy of valuation of closing stock is consistently being followed by the appellant in the previous years as well as in the succeeding years. The Hon'ble Gujarat High Court in the case of Voltamp Transformers Ltd. v/s. CIT (2008) ,217 CTR 254 has held that A.O. has got very limited powers to change valuation of closing stock. The A.O. cannot change method of accounting regularly followed by the assessee without valid reasons. The Hon'ble Supreme Court in the case of Chainrup Sampatram (1953) 24 ITR 481 has also clearly held that profits do not arise out of valuation of closing stock and situs of its arising or accruing where the valuation is made and valuation of unsold stock is necessary part of the process of determining trading results but it can in no sense be regarded as source of such profit. The case of Chainrup Sampatram was also followed by the Hon'ble S.C. in the case of CIT vs Dynavision (2012) 76 DTR 351 (S.C). In this case it is held by Hon'ble S.C. that closing stock cannot be valued by including the element of excise duty when no such adjustment is made in opening stock.
It has also been clearly held in the case of CIT v/s. Ahmedabad New Cotton Mills, 4 ITC 245, that when the opening and closing stock of business are both undervalued, if the method of alteration of both valuation is not adopted, it is perfectly plain that profits which is brought forward is not real one. In such cases, the real profits of a particular year cannot be ascertained by merely raising value of closing stock, not taking into consideration the similar valuation o!f opening stock. As per the ratio of this case, enhancing the value of closing stock without giving corresponding effect to the valuation of opening stock is not proper.
It is also seen that the same issue on identical facts had been decided by my predecessor in favour of the appellant in the immediately preceding year i.e. A.Y.211-12 ii appeal No.CIT(A)-XI/367/Addl.CIT.Cir-5/13-14 dated 29.01.2015. 6.2.1 In view of the above facts, I am not convinced about the maintainability of addition of Rs.1,38,38,690/- in valuation of closing stock. The A.O. is directed to delete addition of Rs.1,38,38,690/- made by the A.O. U/S.145A of I.T. Act, 1961. This ground of appeal is allowed.”
We have heard both the parties reiterating their respective stands against and in support of the impugned addition. There is no dispute that the CIT(A) has followed his preceding assessment year’s findings to delete the impugned addition. We find that the above latter co-ordinate bench in its order dated 14.09.2017 has upheld the same in preceding assessment year 2011-12. We therefore adopt judicial consistency qua the instant issue to uphold the CIT(A)’s
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findings under challenge deleting the impugned closing stock addition. The Revenue’s instant substantive ground as well as main appeal ITA No.3340/Ahd/2015 is rejected.
We accordingly allow assessee’s appeal ITA No.3158/Ahd/2015 and dismiss Revenue’s cross appeal ITA No.3340/Ahd/2015.
[Pronounced in the open Court on this the 15th day of January, 2018.]
Sd/- Sd/- (PRAMOD KUMAR) (S. S. GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad: Dated 15/01/2018 True Copy S.K.SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाइल / Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद ।