MAXWELL & STUART PROJECT MANAGEMENT PVT. LTD.,NEW DELHI vs. ITO, NEW DELHI

These two appeals are filed by the assessee against the respective

order passed by LD. CIT(A) -6 New Delhi for Assessment years 2011-2012

and 2012-2013. Since facts involved in these appeals are common, hence,

the appeals were heard together and are being disposed of by this common

order for the sake of convenience, by dealing with the facts of the ITA No.

649/Del/2017 (AY 2011-2012), however, the decision of this appeal will

apply mutatis mutandis in ITA 650/Del/2017 (AY-2012-12). The effective

ground raised in ITA No. 649/Del/2017 (AY 2011-12) read as under:-

“That on the facts and in the circumstances of the case

and in law, Ld LD. CIT(A) erred in confirming the action of

Ld AO in disallowing a part of total salary paid to Mr John

David Stuart Mackasie a director of appellant who also held

30% of the paid up enquity capital of the appellant,

amounting to Rs 39,25,475 under provisions of section

40(A)(2)(b) of the Act”

1.1 The grounds raised in ITA No. 650/Del/2017 (AY 2012-13) read as

under:-

“That on the facts and in the circumstances of the case

and in law, Ld. CIT(A) erred in confirming the action of AO

in disallowing a part of total salary paid to Mr. John David

Stuart Macaskie, a Director of the appellant who also held

22% of the paid up equity capital of the appellant,

amounting to Rs. 19,02,110/- under provisions of section

40(A)(2)(b).

The appellant craves leave to add to or alter by deletion, substitution or otherwise the above grounds of appeal at any time before or during the hearing of the appeal.”

return on 28.9.2011 declaring loss of Rs. 98,002/-. The return of the

assessee was processed u/s. 143(1) of the Income Tax Act, 1961 (in short

“Act”). Later the case of the assessee was selected for scrutiny under CASS.

Notices under section 143(2) of the Act and u/s. 142(1) of the Act were

issued. In response to the same, statutory notices, the Ld. AR of the

assessee attended the assessment proceedings from time to time and filed

details. The case was examined with reference to the details so filed. The

assessee company is engaged in providing advisory, consultancy, project

management, planning and supervision services. The assessee is engaged

in business of providing advisory, project management, planning and

supervision services. During period under consideration assessee company

paid an amount of Rs 51,75,475/- to Director Mr John David Stuart Mackasie

who is also holder of 30% shares of the assessee company. Terms and

conditions of employment of Mr. John Davind Stuart Mackasie were duly

submitted in assessment proceedings. During assessment proceedings vide

letter dated 24.02.2014 a show cause notice for disallowance was issued to

assessee company being excessive amount of Rs 39,25,475 u/s 40A(2)(b) of

the Act vis a vis agreed remuneration of Rs 12,50,000/-. Letter dated

04/03/2014 was filed by assessee company inter-alia pointing that Mr Stuart

is paying tax at highest slab rate of 30% and assessee company is also

assessed at @ 30% therefore entire issue is revenue neutral. Further it was

pointed out by assessee company in said reply that Mr John Davind Stuart

Mackasie introduced significant new business in company. AO did not found

any merit in assessee company contention and proceeded to apply provisions

of section 40A(2)(b) of the Act and made disallowance of Rs 39,25,475/-

holding that said amount is over and above his entitlement, as per terms and

conditions of employment and assessed the income of the assessee at Rs.

38,96,290/- u/s. 143(3) of the Act vide order dated 06.03.2014. Against the

decision of the AO, assessee appealed before the Ld. CIT(A), who vide his

impugned order dated 09.12.2016 has dismissed the appeal of the assessee

by holding that considering the turnover of assessee company disallowance of

unreasonable payment of remuneration of Rs 39,25,475/- is justified.

Aggrieved by the impugned order, Assessee is in appeal before the Tribunal.

40A(2)(a) from the Act and stated that said provision firstly requires a

formation of honest and objective opinion on part of AO on basis of cogent

material and secondly said opinion must be strictly addressed to a) fair

market value of goods or services for which payment is made ; b) legitimate

needs of the business of assessee c) benefit derived therefrom by the

assessee which are three criteria u/s 40A(2)(a) of the Act. Since in present

case AO has not discharged his salutary burden u/s 40A(2)(a) of the Act as

stipulated therein so entire disallowance made is ex-facie invalid. Then Ld

Counsel for the assessee argued that since Mr Staurt is also taxed @ highest

slab rate of 30% and there is no revenue loss and tax avoidance in

expenditure claimed by assessee company so also present disallowance is not

sustainable in eyes of law. Ld counsel for the assessee further drawn my

attention to paper book placed on records. In support of his contention, he

relied upon two decisions viz. i) Jurisdictional Hon’ble Delhi High Court

decision in case of Sigma Corporation India Limited order dated 15/02/2017

and ii) Delhi ITAT Division Bench decision in case of M/S MEDIA SATELLITE &

TELECOMS LTD (E Bench order) passed in ITA No.1947/Del/2014 order dated

01/07/2016. Copies of both these decisions are placed on records.

and taking support from orders of AO and Ld CIT(A) pleaded for confirmation

of addition made. He further stated that Mr. John David Stuart Macaskie is a

Director and 30% share holder of the assessee company for the year under

consideration and he is attracted by Section 40A(2)(b) of the Act. Thus, the

amount of Rs. 39,25,475/- paid to Mr. John David Stauart Macaskie is over

and above his entitlement, as per terms and conditions of employment and

therefore, was rightly disallowed and later confirmed by the ld. CIT(A), which

did not need any interference.

impugned order, relevant provisions of section 40A(2)(a) and the case laws

cited by the Ld. Counsel for the assessee. For the sake of clarity, it would

be necessary to reproduce the relevant provision of section 40A(2)(a) which

read as under:-

“(2)(a) Where the assessee incurs any expenditure

in respect of which payment has been or is to be

made to any person referred to in clause (b) of this

sub-section, and the 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 :

Provided that [for an assessment year commencing

on or before the 1st day of April, 2016] no

disallowance, on account of any expenditure being

excessive or unreasonable having regard to the fair

market value, shall be made in respect of a specified

domestic transaction referred to in section 92BA, if

such transaction is at arm's length price as defined in

clause (ii) of section 92F.”

has admitted the question of law viz. "Did the ITAT fall into error in restoring

the disallowance of 50% of Rs. 48 lakhs paid to the appellant/assessee

employee for the relevant assessment year validly under Section

40A(2)(b) of the Income Tax Act, 1961?", and answered the same against

revenue and in favor of assessee, their lordships of Hon’ble Delhi High court

has observed as under:

“7. Section 40A(2) of the Act reads as follows:-

"40A Expenses or payments not deductible in certain

circumstances.

(1)....................

(2) (a) Where the assessee incurs any expenditure in

respect of which payment has been or is to be made to

any person referred to in clause (b) of this sub-section,

and the 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."

note of the CBDT Circular dated 06.07.1968, which

clarified what is meant by "reasonable expenditure" in the

context of the AO's discretion under Section 40A. The

CBDT had stated that whenever an AO proposes

disallowance, he has to examine the matter in a fair and

reasonable manner and what should be borne in mind is

that the provision is intended to check evasion of tax

through excessive or unreasonable payments to relatives

and associate concerns, and should not be so applied as to

"cause hardship in bona fide cases". Hive (supra) also

considered the effect of the Allahabad High Court's

decision in Abbas Wazir (P.) Ltd. Vs. Commissioner of

Income Tax [2004] 265 ITR 77 and the Madras High

Court's ruling in CIT Vs. Computer Graphics Ltd. [2006]

285 ITR 84. The Court also relied upon the Calcutta High

Court's ruling in CIT Vs. Edward Keventer (P.) Ld. [1972]

86 ITR 370. In Edward Keventer's case (supra), the Court

had stated that the reasonableness or otherwise of the

expenditure should take into account firstly the legitimate 8

business needs of the assessee or the company, secondly,

benefits derived by or accruing to the company, and that

while doing so, the view point of the company or concern

having regard to prudent business practices, should

prevail. This decision was affirmed by the Supreme Court

in CIT Vs. Edward Keventer (P.) Ltd. [1978] 115 ITR 149.

Pertinently, the Calcutta High Court in Edward Kevender

(P.) Ltd. (supra) summarized the position as follows:-

"13..................It is not for the

Assessing Officer to dictate what the business

needs of the company should be and he is only

to judge the legitimacy of the business needs

of the company from the point of view of a

prudent businessman. The benefit derived or

accruing to the company must also be

considered from the angle of a prudent

businessman. The term "benefit" to a company

in relation to its business, it must be

remembered, has a very wide connotation and

may not necessarily be capable of being

accurately measured in terms of pound,

shillings and pence in all cases. Both these

aspects have to be considered judiciously,

dispassionately without any bias of any kind

from the view-point of a reasonable and honest

person in business."

additionally also took note of S.A. Builders Vs.

Commissioner of Income Tax [2007] 289 ITR 26,

where the Supreme Court had said that the

Revenue ought not to place itself in the arm chair of

businessman in dealing with such matters. Modi

Revlon (supra) further emphasised that:-

"25. This Court notices that in order to

determine whether the payment is not

sustainable, the AO has to first return a finding

that the payment made is excessive,

under Section 40-A(2) of the Income Tax Act.

If it is found to be so, then the AO has to

determine what constitutes the fair market

value of the services rendered and disallow the

difference between what is claimed and what is

such value determined (as fair market value).

Apart from the fact that no such exercise was

undertaken by the AO, the Court sees that the

assessment order went off into a tangent, in

following a method that was clearly

inapplicable. The annual cap of `30 lakh

payable to managerial personnel applied to

public limited companies, and not those such

as the assessee. This aspect was noticed by

the CIT (A) who set aside the disallowance.

The Tribunal upheld that finding. Such view (of

admissibility of similar consultancy charges) is

supported by several decisions, which have

been noticed in the detailed order of the CIT

(A). This Court finds no valid grounds to

interfere with those findings, which are both

sound and reasonable."

Court is of the opinion that the ITAT in the

present case overlooked the materials that

were to be taken into account, i.e.

reasonableness of the expenditure having 11

regard to the prudent business practice from a

fair and reasonable point of view. The AO's

order nowhere seeks to benchmark the

expertise of Mr. Preetpal Singh with any other

consultant and proceeds on an assumption that

he could not have performed multiple tasks for

more than one concern. In this Court's opinion,

such a stereotyped notion can hardly be

justified in today's business world where

consultants perform different tasks, not only

for one concern but for several business

entities. A common example would be that of

an accountant or a legal professional, who

necessarily has to multi task and are recipients

or retainers of payments from many concerns

having regard to their special expertise.

Likewise in other fields i.e. journalism, the

medical profession etc. more than one entity

may engage or retain a single professional on

the basis of his experience, learning and

expertise, unless there is a deeper scrutiny

that involves comparable analysis of like

situations (a highly difficult task), additions

made under Section 40A(2) would be suspect.”

(supra) in context of section 40A(2)(a) has held as under:

“8. After perusing the aforesaid finding of the Ld. CIT(A),

we are of the view that assessee has already explained

with the documentary evidence that how much it would

have cost to the assessee if same services were to be

availed either by employing whole time employees on its

role or obtaining the services of the independent

consultants on these areas. We also note that the AO did

not ascertained Fair Market Value (F.M.v.) of the services

and other connotations to establish that assessee has paid

unreasonable amount and quantum of payment does not

commensurate with the services rendered. Since the level

of discount given is same to all dealers, the FMV has not

been violated. The intention behind the provision of

Section 40A(2)(a) is to prevent the intentional reduction in

tax liability by certain assessee's by diverting business

profits to close relatives and concerns in the form of

excessive payments for goods and services received. The

facts and circumstances of the case does not shows any

such tax evasion plan. Both the companies are the tax -

paying entities at the same rate of tax. So long as the

arrangement is genuine and bona fide and the intention is

not to evade taxes, it cannot be disregarded for the

purpose of determining the taxability of the respective

entity. We further note that Ld. CIT(A) relied upon the

decision of Hon'ble High Court in the case of CIT Vs. M/s

Gautam Motor (2010) 194 Taxman 21 (Delhi) also 334 ITR

326 (Del) wherein it was held that, "There is no case made

out by the Department that any tax avoidance has been

attempted by these arrangements. We, therefore, see no

justification to hold the additions made by the Ld. AO and

sustained by the CIT(A), the same is directed to be deleted

and this ground of appellant is allowed.”

8.1 We further find that Ld. CIT(A) has also relied upon the

case of Glaxo Smith kline Asia Pvt. Ltd. (SLP Civil No.

18121/2007), wherein the Hon'ble Supreme Court has held

that in the case of related party transactions the

authorities must examine whether there is any loss of

revenue. And, if exercise is revenue neutral, than the

matter may be decided accordingly. So long as the

arrangement is genuine and payments have actually been

made and there is no tax evasion planning involved, when

both the entities are paying tax at the maximum marginal

rate, there cannot be any justification in disallowing any

amount on estimated basis. Such revenue neutral addition

made by AO unnecessarily increases avoidable academic

exercise. In the case CIT Vs. M/s Excel Industries Ltd. in

appeal no. 125 of 2013 vide order dated 08.10.2013 the

Hon'ble Supreme Court held that the AO is required to be

pragmatic and not pedantic. The Apex Court also observed

that Revenue cannot be allowed to flip-flop on the issue

and it ought let the matter raised rather than spend the

tax payers money in pursuing litigation for the sake of it.

In the similar facts and circumstances of the case, the

Apex Court observed that "It is not as if the Revenue has

been deprived of any tax. We are told that the rate of tax

remained the same in the present A.Y. as well as in the

subsequent A.Y. Therefore, Ld CIT(A) has rightly held that

the dispute raised by the Revenue is entirely academic or

at best may have a minor tax effect and held that there

was, therefore, no need for the Revenue to continue with

this litigation when it was quite clear that not only was it

fruitless (on merits) but also that it may not have added

anything much to the public coffers." In view of the above,

in our considered opinion, Ld. CIT(A) has rightly

respectfully followed the judicial pronouncements

discussed above and also because the nature of

transaction is genuine and in the absence of any revenue

loss, and rightly deleted the disallowance by passing a well

reasoned order which does not need any interference on

our part, hence, we uphold the same. Accordingly, this

ground raised by the Revenue is decided in favour of the

Assessee and against the Revenue”.

respectfully following the precedents, as aforesaid and after making

collective study of text of section 40A(2) of the Act, I find that extant

expenditure made by assessee here is not only bonafide but is also made for

genuine and legitimate business purposes of assessee and there is no tax

evasion plan and revenue loss warranting application of section 40A(2)(a) of

the Act. No contrary decision is placed before me. Considering all these I find

merit in arguments of Ld counsel for the assessee and therefore, direct the

AO to delete the disallowance made u/s 40A(2)(b) of the Act of

Rs 39,25,475/- and set aside the order Ld CIT(A) and accordingly, the

appeal of the assessee for the assessment year 2011-12 is allowed.

and identical, so disallowance of Rs 19,02,110/- made in that year is also

directed to be deleted by applying aforesaid reasoning mutatis mutandis to

this appeal also.

Order pronounced on 22-02-2019.

- Sd/-

(H.S. SIDHU) JUDICIAL MEMBER

Dated: 22-02-2019

SR BHATNAGAR