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Income Tax Appellate Tribunal, “A” BENCH, PUNE
Before: SHRI S.S.GODARA, JM & SHRI DR. DIPAK P. RIPOTE, AM
आदेश / ORDER PER S. S. GODARA, JM :
This assessee‟s appeal for A.Y. 2014-15 is directed against the CIT(A)- 13, Pune‟s order dated 11/09/2017 passed in case No. PN/CIT(A)- 13/ACIT/Satara Circle, Satara/132/2016-17/275 involving proceeding u/s. 143(3) of the Income Tax Act, 1961 ; in short "the Act”.
Heard both the parties. Case file perused.
Coming to the assessee‟s sole substantive grievance that both the lower authorities have erred in law and on facts in disallowing incremental salary
Shriram Sahakari Sakhar Karkhana Ltd., payments paid to its employees deputed to Shriram Jawahar Shetkari Sahakari Sakhar Udyog (SJSSU) amounting to Rs.1,91,27,285/- we note that the CIT(A)‟s detailed discussion affirming assessment findings to this effect reads as under.
Para 2.4 to 2.11 “2.4 In this case, the employees of Shriram SSK Ltd have worked on deputation at the Appellant's premises. Their salary was paid by Jawahar SSK Ltd. The learned AO has reproduced the Article 15 of the Partnership Deed between Shriram SSK Ltd and Jawahar SSK Ltd in the assessment Order and concluded that Jawahar SSK Ltd had undertaken to reimburse the salaries of the Appellant's employees. The Appellant's role was only to distribute the salary payment among its employees. Therefore, the payment made for the increment of salary cannot be allowed as a deduction in the Appellant's hands in the absence of any documentary evidence of the payment. Accordingly, he added the amount of Rs 1,91,27,285 to the Appellant's total income.
2.5 I have considered the facts and arguments of the Appellant. I agree with the learned AO. According to me, the responsibility of the payment of salary of the employee is that of the employer. In almost all the cases, legal as well as economic employer of the employee is same. However, when an employee is on deputation, his economic employer is the one who exercises control over his work during the period of the deputation whereas, his legal employer is the person with whom, he has legal employer-employee relationship. The legal employer is the one who has issued an appointment letter to the employee and he has right to terminate his employment. When employee works either on a deputation or on a secondment, such employee's salary is paid by his economic employer. It is because during the period of deputation, an employee renders his services to the economic employer; therefore, it is natural that the economic employer pays salary to the employee for the services rendered by him.
Shriram Sahakari Sakhar Karkhana Ltd.,
2.6 In this case, it would appear that the JV is an economic employer because the employees have worked for the JV. However, it is not correct. The reading of the entire agreement of the partnership deed shows that it is the Jawahar SSK Ltd, which hired the Appellant for carrying out manufacturing of sugar. In normal circumstances, the Appellant being a manufacturer should have borne risks and should have enjoyed rewards from the sugar manufacturing business. However, in this case, it is Jawahar SSK, which bears all the risks and enjoys the rewards of the sugar manufacturing business. This is because; the Appellant despite being a partner, according to the Article 9 and 12 of the Partnership Deed is not responsible for the profit but is entitled only to the compensation for its services.
2.7 In this connection, relevant Article 9 and 12 are reproduced as under: 11. Sharing of risks and/or profits: Since the party of the second part is bringing its entire strength of finance and expertise and is shouldering the responsibility of entire day to day management and execution, it will be entitled for all the profits after payment of compensation @ Rs.100% per M.T. of sugarcane crushed for the first five crushing seasons i.e. from 2006-2007 to 2010-2011, @ Rs. 110/- per M.T. for next period of five years i.e. from crushing seasons 2011-2012 to 2015-2016 and @.Rs. 120/- per M.T. for the further period of five years i.e. from crushing seasons 2016-2017 to 2020-2021 to the partner, all the expenses, liabilities including the tax liabilities as approved by the Commissioner of Sugar and Registrar of Co-operative Societies under his order No 77/2006 dtd. 3019/2006. The partner shall not be responsible for any losses or shortages in the operations of the said sugar plant by the working partner. The partner shall be entitled for the compensation as enumerated hereunder and the benefits of future developments, which would accrue them through the modernization and expansion, diversification of the said sugar plant and activities by the working partner. The partner shall also Shriram Sahakari Sakhar Karkhana Ltd., be entitled to ensure that the privileges of the members are to be given in the context of sugarcane development programmes and the timely crushing of entire cane of its members by the management.
Compensation: The PARTNER shall be entitled for the compensation for its capital contribution in kind for the use of the said sugar plant by the management and for the providing of entire sugarcane from its area of operation. This compensation shall be linked with the crushing of sugarcane per annum by the management. The rate of compensation shall be as Mentioned at clause No 9.
2.8 From the above, it can be seen that the real nature of the above arrangement is that it is the Jawahar SSK Ltd, which has hired the Appellant for sugarcane manufacturing. It is clear that Jawahar SSK Ltd has shifted its profits earned from manufacturing of sugar to JV (which is a company) to prevent being hit by the controversy of taxing profit of sugar co-operative societies on a difference between FRP and the actual sale price. For this reason, it pays salaries of the Appellant's employees as a part of the compensation payable to the Appellant. Therefore, the legal entity of the JV has to be disregarded for the purpose of payment of the salary considering the real nature of the business arrangement between them. With the result, I hold that Jawahar SSK Ltd is the economic employer of the Appellant's employees.
2.9 With regard to the issue of the payment of increment in salary, in my view, when salary is paid by the economic employer-Jawahar SSK Ltd then logically, the increment in salary should be paid by it. Further, an employee is entitled to get an increment in salary because of work done by him during the year. Therefore, increment in salary should also be paid by Jawahar SSK Ltd even from this perspective.
2.10 There could be an exception to this logic, if a particular party agreed to bear the expense of the increment in salary. However, the Shriram Sahakari Sakhar Karkhana Ltd.,
Appellant has not pointed out any relevant provision in the partnership deed or any other documentary evidence, which would indicate that the liability of increment in salary was to be borne by the Appellant. Therefore, the deduction of increment in salary cannot be allowed in the Appellant's hands merely because it is a legal employer. With the result, I agree with the disallowance made by the learned AO.
2.11 In view of the above discussion, I hold that the Appellant has neither established its liability to pay the increment in salary nor has established that the same was indeed paid by it by furnishing the documentary evidence. With the result I agree with the disallowance made by the learned AO. Accordingly, I confirm the disallowance of Rs 1,91,27,285 made by the learned AO paid for increment of salary.”
Both the learned representatives reiterated their respective stands during the course of hearing. The Revenue more particularly argued that this assessee had already deputed its employees with the latter entity „SJSSU‟ since long and therefore, the impugned expenditure could hardly be held to have been incurred “wholly” and “exclusively” as well as “necessarily” for the purpose of its business u/s. 37 of the Act.
We find no merit in Revenue‟s forgoing arguments. We first of all quote Sasson J David Co Ltd. 118 ITR 261(SC) that an expenditure need not be “necessarily” incurred for the purpose of the business in issue. Coupled with this, we note that the assessee‟s impugned incremental salary was nowhere covered in the relevant clause 15 of the agreement with „SJSSU‟ which was executed way back on 9.10.2008. And further that the learned
Shriram Sahakari Sakhar Karkhana Ltd., lower authorities have nowhere made such a disallowance in all preceding assessment years.
Mr. Phadke next took us assessee‟s board of director‟s resolution dated 08.09.2011 purposing to pay incremental salary after state level tripartite meeting including government functionaries as well as labour union; to be shared with the latter entity. All this sufficiently indicates that the assessee‟s impugned payments of incremental salary to its employees has indeed been “wholly” and exclusively incurred for the purpose of its business eligible for deduction u/s. 37(1) of the Act. It‟s instant sole substantive ground stands accepted therefore. Ordered accordingly.
This assessee‟s appeal is allowed in above terms. Order pronounced in the Open Court on this 8th day of June, 2022.
Sd/- Sd/- S SS (DR.DIPAK P.RIPOTE) (S.S. GODARA) लेखध सदस्य/ ACCOUNTANT MEMBER न्यधनयक सदस्य/JUDICIAL MEMBER पपणे / Pune; ददनधांक / Dated : 8th June, 2022. Ashwini आदेश की प्रनतनलनप अग्रेनषत / Copy of the Order forwarded to : अपऩलधथी / The Appellant. 1. प्रत्यथी / The Respondent. 2.
3. The CIT(A)-13, Pune.
4. The Pr.CIT-3, Pune. 5. नवभधगऩय प्रनतनननध, आयकर अपऩलऩय अनधकरण, “ए” बेंच, पपणे / DR, ITAT, “A” Bench, Pune. गधर्ा फ़धइल / Guard File. 6. आदेशधनपसधर / BY ORDER, // True Copy // Senior Private Secretary आयकर अपऩलऩय अनधकरण, पपणे / ITAT, Pune.
Shriram Sahakari Sakhar Karkhana Ltd.,
S.No. Details Date Initials 1 Draft dictated on 12.05.2022 2 Draft placed before author 01.06.2022 Draft proposed & placed before the Second 3 Member 4 Draft discussed/approved by Second Member 5 Approved Draft comes to the Sr. PS/PS 6 Kept for pronouncement on 7 Date of uploading of Order 8 File sent to Bench Clerk 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