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Income Tax Appellate Tribunal, DELHI BENCH: ‘SMC’ NEW DELHI
Before: SHRI H.S. SIDHU
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 (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 (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.”
The brief facts of the case are that the assessee company filed its e- 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.
Ld. Counsel for the assessee draw my attention to provisions of section 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 order dated 01/07/2016. Copies of both these decisions are placed on records.
On the other hand, Ld DR vehemently opposed arguments of Ld AR 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.
I have heard both the parties and perused the records, especially the 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.”
I find that the Hon’ble Delhi High Court in the case of Sigma case (supra) 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."
In Hive Communication's case (supra), this Court took 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."
Likewise in Modi Revlon's case (supra), the Court
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."
10. Having regard to the above position, this 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.”
I further find that ITAT, Division ‘E’ Bench, Delhi in case of Media Satellite (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”.
8. Keeping in view of the facts and circumstances of the case and 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.
9. Since facts permeating in ITA 650/Del/2017 for AY 2012-2013 are similar 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.
In the result, both the assessees appeals are allowed.
Order pronounced on 22-02-2019.