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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N V VASUDEVAN & SHRI A K GARODIA
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE
BEFORE SHRI N V VASUDEVAN, VICE PRESIDENT AND SHRI A K GARODIA, ACCOUNTANT MEMBER
ITA No. 353/Bang/2017 Assessment year : 2010-11
Neobytes Software Solutions Vs. The Deputy Commissioner of Pvt. Ltd., Income Tax, No.50, 1st Main Road, 9th Cross, 5(3)(1), 3rd Phase, J P Nagar, Bangalore. Bangalore – 560 078. PAN: AABCN 5027F APPELLANT RESPONDENT
Appellant by : Shri Prashanth G.S., CA Respondent by : Shri Sunil Kumar Agarwal, Addl.CIT(DR)(ITAT), Bengaluru
Date of hearing : 04.11.2019 Date of Pronouncement : 06.11.2019 O R D E R Per N V Vasudevan, Vice President This appeal by the assessee is against the order dated 25.11.2016 of the CIT(Appeals)-5, Bengaluru relating to assessment year 2010-11.
The assessee is a company engaged in the business of software development and is eligible for deduction under section 10A of the Income- Tax Act, 1961 [“the Act”]. For the year under consideration the assessee had filed return of income on 17.09.2010 declaring a total income of Rs.50,27,399, consisting of business income of Rs. 8,09,626 and short term capital gains as per section 111A of the Act at Rs. 42,17,773.
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The appellant had claimed a deduction of Rs. 7,36,48,153 under section 10A of the Act. In support of the claim under section 10A of the Act, the assessee had also produced Form 56F duly certified by the Chartered Accountant.
The learned AO passed an order of assessment under section 143 of the Act dated 31.01.2013 determining total income of the appellant at Rs.2,73,86,777 as against Rs. 50,27,399 as returned by the assessee thereby reducing the deduction under section 10A by Rs. 2,20,13,607.
While arriving at the business profits for computing deduction u/s. 10A of the Act, the assessee had debited to the Profit & Loss account a sum of Rs. 63,04,700 towards Directors' remuneration. The amount debited is in accordance with law and more so the Companies Act, 1956 as per which the remuneration was paid. According to the AO, the assessee had debited a sum of Rs.3,82,62,500 for the AY 2011-12 as directors’ remuneration which worked out to 25% of turnover for that assessment year. The AO compared the remuneration debited for the impugned assessment year with that of assessment year 2011-12 and held that the percentage of remuneration to the export turnover for the impugned assessment year was only 6% as against 25% for assessment year 2011- 12 and thus he adopted 25% as the basis for deciding the remuneration for the impugned assessment year. Therefore deduction u/s. 10A was allowed less by Rs.2,20,13,607.
Before the CIT(Appeals), the assessee submitted that the AO is incorrect in determining the remuneration of the director for the impugned assessment year at 25% of turnover based on the claim in future year i.e. assessment year 2011-12. The assessee submitted that the directors' remuneration is payable only as per the discretion of Board of Directors of the company as per the provisions of Companies Act, 1956 and it is
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submitted further that the AO has no role to play in deciding the remuneration payable to the directors. It is settled position of law that commercial expediency of a company cannot be questioned by the revenue. The assessing officer cannot assume the arm chair of the assessee and decide how the assessee must conduct its affairs. Reliance is placed on the decision of the Supreme Court in the case of S A Builders Ltd vs CIT reported in 288 ITR 1 (SC). It was submitted that the action of the AO in taking the amount debited for assessment year 2011-12 towards directors' remuneration as sacrosanct and a valid yardstick to decide the remuneration paid in the previous years' is a process not known to law and thus the assessment order needs to set aside on this count alone in the interest of equity and justice.
The CIT(Appeals), however, confirmed the order of the AO. He noted that the Assessing Officer has observed that the remuneration to the directors is necessarily an important expenditure because the directors manage the affairs of the company as a whole and there is no reason why commensurate remuneration should not be factored for A.Y.2010-11 particularly when the same is charged to the P&L account for A.Y.2011-12. The appellant by not charging the commensurate remuneration has declared a higher profit in the P&L account for A.Y.2010-11 resulting in a consequent claim of higher deduction u/s.10A. Considering the facts that the appellant has charged 25% of the turnover of the company as remuneration in A.Y.2011-12, remuneration for A.Y.2010-11 is also determined at 25% of the turnover amounting to Rs.2,79,72,536/-. According to the CIT(Appeals), since a sum of Rs.63,04,700/- is already debited towards the remuneration, the balance of Rs.2,16,67,837/- is treated as expenditure in the STPI unit and the deduction u/s.10A is restricted to Rs.5,19,80,317.
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Aggrieved by the order of CIT(Appeals), the assessee is in appeal before the Tribunal. The grievance of the assessee against the disallowance of part of deduction u/s. 10A of the Act is projected in ground Nos.2 to 5 of the grounds of appeal.
At the time of hearing, it was brought to our notice by the ld. counsel for the assessee that in AY 2009-10, identical disallowance of part of deduction u/s. 10A for identical reason viz., revising the remuneration of directors came up for consideration in assessee’s own case and the Tribunal in ITA No.1108/Bang/2017 by order dated 6.9.2019 upheld the order of CIT(Appeals) deleting disallowance made by the AO. The following were the relevant observations of the Tribunal:-
“8. We have perused submissions advanced by both sides in light of records placed before us. 9. Ld.CIT(A) deleted addition by observing as under: “6. For the services by a Director, the remuneration payable has to be determined by the articles of the company or by a resolution or by a special resolution passed by the company in a general meeting. If the articles so require. Thus, the remuneration payable to a Director may vary from year to year based on the articles or a resolution passed by the company in a general meeting. It was not mandated under statute that remuneration must be paid to the Directors. The AO has referred to the fact of remuneration paid in AY: 2011-12 and held that by not debiting Director’s remuneration in the profit and loss account for AY: 2009-10, it had claimed higher deduction u/s 10A. The AO has held, “This is against the provisions of law”. However, as seen above, there is no such legal provision which required charging of Director’s remuneration. It is settled law that no expenditure could be forced on an assessee. The AO has not brought on record as to which services were provided by the Directors and for which no remuneration as paid so as to enable the appellant to earn more than ordinary profits. Therefore, the provisions of section 80IA(10) and 10A(7) are also not
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attracted in the present case. Under the circumstances, the disallowance of Rs.3,18,86,593/- as deduction under section 10A as made by the AO on account of non- charging of Director’s remuneration is deleted. The ground nos.3,4,5,6 & 7 are allowed”. We are of considered opinion that commercial expediency of a company cannot be questioned by revenue and decision to pay remuneration to Directors or not is within the realm of management decisions and Ld.AO has no role to play in it. We therefore do not find any infirmity in view of Ld.CIT(A) and the same is upheld. Accordingly this ground raised by revenue stands dismissed.” 10. Following the aforesaid order of the Tribunal, we direct the disallowance u/s .10A to be deleted.
The other grounds of appeal were not pressed for adjudication.
In the result, the appeal by the assessee is partly allowed.
Pronounced in the open court on this 6th day of November, 2019.
Sd/- Sd/-
( A K GARODIA ) ( N V VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT
Bangalore, Dated, the 6th November, 2019.
/ Desai Smurthy /
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Copy to:
Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file
By order
Assistant Registrar, ITAT, Bangalore.