HEALTH ASYST PRIVATE LIMITED,BANGALORE vs. THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-3(1)(2), BANGALORE

ORDER PER BEENA PILLAI, JUDICIAL Present appeal has been filed by assessee against order dated 15/06/2018 passed by the Ld.CIT(A)-3, Bangalore for assessment year 2015-16 on following grounds of appeal:

“1. The order of the learned CIT (Appeals) in so far as they are against the Appellant is opposed to law, arbitrary and unjustified.

4. The Lower Authorities erred by not following the principles laid down in Circular 6-P of 1968 which is binding on the departmental authorities as held in various judicial precedents.

Brief facts of the case are as under: 2. The assessee is a company engaged in the business of computer software services. It filed its return of income for year under consideration on 28/11/2015 declaring total income of Rs.4,23,79,510/- under normal provisions of the Act. The return was processed under section 143(1) of the Act and notice under section 143(2) was issued to assessee. In response to statutory notices, representative of assessee appeared before the Ld.AO and filed requisite details as called for. 2.1 The Ld.AO on perusal of records noted that, assessee paid to directors of the company in the form of salary and commission, which was more than what was remunerated in the immediately preceding assessment year. The Ld.AO noted that the turnover dropped during the year under consideration and the profit was also less as compared to the previous years. However, the Ld.AO noted that the amount paid to the director was double without any basis. The Ld.AO considered it to be unreasonably high and excessive being payment to the related party. 2.2 In response to the notice, the assessee submitted that, invoking section 40A(2) amounts to double taxation for the same transaction, as the director paid taxes at the same rate at which the assessee paid its taxes. The Ld.AO rejected the submissions of assessee and disallowed the payment made to the director under section 40A(2) of the Act.

3. Aggrieved by the order of the Ld.AO, the assessee preferred appeal before the Ld.CIT(A). 3.1 Before the Ld.CIT(A), the assessee submitted that payment made to director, Mr.Umesh Bajaj included salary of Rs.1,41,93,809/- and the balance amount of Rs.6,00,00,000/- incentive. It was submitted that, the incentive was paid in the month of February and March 2015. Efforts to bring several new contract during the year and that helped the assessee to achieve turnover of 32.74 crores. Assessee submitted that the incentive was given to the director for his relentless of efforts made during the year to attain the turnover which otherwise would not have happened since the assessee was towards the closure. 3.2 The assessee submitted that the amount paid to the director has suffered tax at the rate of 33.45% in the hands of the Director, which is also the tax payable in the hands of assessee. Assessee relied on the CBDT Circular No.6P dated 06/07/1968, to support its contention and argued that, section 40A(2) could be invoked only in cases where the payment is made to evade tax. 3.3 The Ld.CIT(A) rejected contentions of the assessee and upheld the addition made by Ld.AO. 3.4 Aggrieved by the order of the Ld. CIT (A), the assessee is in appeal before us now.

4.3 The Ld.AR placed reliance on Hon’ble Gujarat High Court in case of DCIT vs Gujarat Gas Financial Services Ltd. reported in 2015-TIOL-1621-HC-AHM-IT had an occasion to consider the allowability of excessive and unreasonable expenditure being a transaction between parent company and the assessee therein being covered under section 40(A)(2) of the Act. Hon’ble Court held that, transaction between the relatives and associate would be treated as bona fide case unless the officer finds that one of them is trying to evade payment of tax. He also relied on the decision of Hon’ble Bombay High Court in case of CIT vs Indo Saudi Services (Travel) Pvt. Ltd., reported in 310 ITR 306 where assessee was a general sales agent of a foreign airline and that, the Ld.AO found therein that incentive commission paid by that assessee to its sister concern was half percent more than that paid to other subagents. Relying on the provisions of section 40(A)(2) of the Act, the Ld.AO therein disallowed excess commission paid to the sister concern at the rate of half percent. Hon’ble Bombay High Court while analysing the issue alleged by the revenue, held that revenue was not in a position to point out how assessee evaded payment of tax by the alleged payment of higher commission to its sister concern as the sister concern was also paying tax at a higher rate and copies of the assessment order of sister concern were taken on record by the Tribunal. 4.4 In the present facts of the case, assessee paid to its director salary and commission being percentage of the profits earned. We find that expenditure was claimed by assessee on account of payment of salary and commission to the director which is not in violation of any prevailing provisions of the Act. Further, it is also stated that the director to whom the payment was made by assessee is also paying taxes being in the highest tax bracket. Facts before us are similar to decision relied by the Ld.AR which has not been refuted by the revenue. In the present fact, Revenue has not made out any cases of tax evasion. However in the interest of Justice we remand this issue back to the Ld. AO only to verify the rate of tax applicable to the director during the year under consideration and to consider the claim of assessee in accordance with the various ratios laid down and relied upon hereinabove. Accordingly the grounds raised by assessee stands allowed. In the result appeal filed by assessee stands allowed. Order pronounced in open court on 22nd July, 2021.