ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE - 5(1)(1), BANGALORE vs. M/S. NEOBYTES SOFTWARE SOLUTIONS PVT. LTD., BENGALURU

2. Whether on the facts and circumstances of the case, the CIT(A) is justified in deleting the disallowance of (B)/2017 2 Rs.3,18,86,593/- as deduction u/s 10A of the IT Act, 1961 as made by the AO on account of non-charging of Director’s remuneration.

Brief Facts of the case are as under The assessee company filed return of income for AY: 2009-10 on 23-09-2009 declaring total income of Rs.9,42,810/-. The return was processed u/s 143(1). This case was selected for scrutiny as per CASS and notice u/s 143(2) was duly served on 13.09.2010. Assessee was asked to furnish details as per notice u/s142(1). Ld.AO observed that assessee declared profit of Rs.11,12,31,614/- on a total turnover of Rs.12,75,46,172/- for AY: 2009-10 and necessary adjustments to net profit as per provisions of the IT Act, assessee has claimed deduction of Rs.10,93,62,500/- u/s 10A and offered Rs.9,42,806/- as taxable income. In support of claim u/s 3 10A, assessee produced Form-56F duly certified by Chartered Accountant. 2.1 It was observed that assessee derived income from its associated enterprise NeoBytes LLC in US and assessee is eligible to claim deduction u/s 10A. On examination of profit and loss account Ld.AO observed that assessee declared high rate of net profit amounting to Rs.11,12,31,614/- on turnover. The assessee was therefore, asked to substantiate the claim of higher profit for AY: 2009-10. The assessee however, submitted that operations stated towards the end of FY:2007-08 and from AY:2009-10 to AY: 2011-12, return of income were filed consistently declaring higher profits. Further, notwithstanding the fact that deduction u/s10A was no longer available as per law,assessee submitted that it paid advance tax for AY: 2012-13 on similar rate of profit as declared in earlier assessment years. In support of its contention assessee produced copies of profit and loss account of subsequent assessment years and details of advance tax paid in FY: 2011-12 before Ld.AO. Accordingly, assessee submitted that profit declared during AY: 2009-10 was based on actual transactions. “While framing the assessment, the ld.AO made following disallowances: “a) The AO reworked the eligible deduction under section 10A of the Act, from Rs.10,93,62,500/- claimed by the appellant to Rs.7,74,75,907/- allowed by the AO thereby not granting an amount of Rs.3,18,86,593/-. b) Re-computing the deduction under section 10A by making adjustment for export turnover and consequently, treating a sum of (B)/2017 4 Rs.9,49,350/- as amount not eligible for deduction under section 10A.”.

Aggrieved by additions made, assessee preferred appeal before Ld.CIT(A), who allowed claim of assessee. 4. Aggrieved by order of Ld.CIT(A) revenue is in appeal before us now. 5.Ground No.1, 4-5 are general in nature and do not require adjudication. 6. Ground No.2 Revenue is aggrieved by impugned order as Ld.CIT(A) deleted addition made on account of directors remuneration. 7. At the outset, Ld.AR submitted that it is out of domain of Ld.AO to notionally charge directors remuneration, which is contrary to law. It has been submitted that Ld.AO charged 25 % of export turn over for A.Y:2011-12 as remuneration payable to directors for year under consideration, thereby inflated 10A deduction. He submitted that assessee commenced its operations during AY 2009-10 and since it was the first year, no remuneration was paid to Directors keeping in view the uncertain nature of operations and future prospects of company. It has been submitted that Directors were paid remuneration from AY: 2011-12 as per provisions of Companies Act, 1956. Ld.CIT, DR placed reliance on orders passed by Ld.AO. 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 (B)/2017 5 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 801A(10) and 10A(7) are also not 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 noon-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