TRIMODE PROPERTIES PVT. LTD.,MUMBAI vs. DCIT - 15(3)(1), MUMBAI

IN THE INCOME-TAX APPELLATE TRIBUNAL “F” BENCH MUMBAI BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH JUDICIAL MEMBER ITA No. 3471/Mum/2012 (Assessment Year 2009-10) Trimode Properties Pvt. Ltd. ACIT - 10(3) DGP House, 3rd Floor, Aayakar Bhavan, M.K. Road, 88C, Old Prabhadevi Road, Mumbai-400020. Mumbai-400025. Vs. PAN: AABCT2569F Appellant Respondent ITA No. 4977/Mum/2016 (Assessment Year 2012-13) Trimode Properties Pvt. Ltd. DCIT - 15(3)(1) DGP House, 3rd Floor, Aayakar Bhavan, M.K. Road, 88C, Old Prabhadevi Road, Mumbai-400020. Mumbai-400025. Vs. PAN: AABCT2569F Appellant Respondent Appellant by : Shri Percy J. Pardiwalla, Shri Nitesh Joshi & Shri Hitesh Trivedi (ARs) Respondent by : Shri Rajiv Gubgotra (DR) Date of Hearing : 10.05.2019 Date of Pronouncement : 26.06.2019 ORDERUNDER SECTION 254(1)OF INCOME TAX ACT PER PAWAN SINGH, JUDICIAL MEMBER; 1. These two appeals by assessee are directed against the orders of ld. Commissioner of Income-tax [CIT(A)]-22, Mumbai dated 27.02.2012 and ld. CIT(A)-24, Mumbai dated 24.06.2016 for Assessment Year (AY) for

ITA No. 3471/M/12 & 4977/M/16- Trimode Properties Pvt. Ltd.

2009-10 & 2012-13 respectively. In both the appeals the assessee has

raised certain common grounds of appeal, therefore, both the appeals were

clubbed, heard together and are decided by a consolidated order. With the

consent of parties appeal for Assessment Year 2009-10 was treated as lead

case. In appeal for Assessment Year 2009-10, the assessee has raised the

following grounds of appeal:

ITA No. 3471/M/12 & 4977/M/16- Trimode Properties Pvt. Ltd.

(b) The appellant submits that the car was used wholly and exclusively for the purposes of its business and depreciation on the said car ought to have been allowed.

stated to be engaged in the business of leasing of property. The assessee

filed its return of income for Assessment Year 2009-10 on 29.09.2009

declaring total income at Rs. 2,68,00,51/-. The return of income was

selected for scrutiny. The assessment was completed under section 143(3)

on 13.12.2011. The Assessing Officer while passing the assessment order

disallowed Rs. 25,50,000/- being 50% of Director’s remuneration by

treating the same as excessive and not having incurred wholly and

exclusively for the purpose of its business, disallowed Rs. 84,60,000/-

being 50% of the rent paid on accommodation provided to one of the

Director as not incurred wholly and exclusively for the purpose of

business and disallowed depreciation on Car for Rs. 14,15,113/- holding

that Motorcar has been used for personal purpose by the Directors. The 3

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assessing officer while disallowing the Directors remuneration and

accommodation of rent also treated the same as payment made to related

parties under section 40A(2). On appeal before the ld. CIT(A), all the

disallowances were confirmed. Therefore, further aggrieved by the order of

ld. CIT(A), the assessee has filed the present appeal before us. 3. We have heard the submission of ld. Authorized Representative (AR) of

the assessee and ld. Departmental Representative (DR) for the Revenue

and perused the material available on record. Ground No.1(a) (b) & (c)

relates to disallowance of 50% of Director’s remuneration and 50%

disallowance of rent paid for accommodation provided to one of the

director. The ld. AR of the assessee submits that one of the objects of the

assessee-company is leasing of property. The assessee has shown its

income from rent and dividend on investment on deposits. The Assessing

Officer made the addition on his observation that assessee failed to prove

the services rendered by Directors / Dr. Gita Piramal and Ms Aparana

Piramal. The assessing officer took his view that the remuneration paid to

the Directors are not only excessive but is not wholly and exclusively for

the purpose of business. It was submitted that the Directors were involved

in process of identifying potential tenant for letting the property on rent.

The Director entered into negotiation and executed rent agreement. The

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continuous process beginning that identifying potential tenant, entered into

negotiation and continuous review of business and to attend the other

emergencies than exigency. The Assessing Officer failed to prove that

payment made was excessive or unreasonable having regard to the market

value of goods, services or such facilities for which the payment is made or

expenditure is excessive or unreasonable having regard to the legitimate

need of business or such expenditure is excessive or unreasonable having

regard to the benefit derived by accruing there from. It was argued that

during the assessment, the assessee was asked to justify the claim of

expenditure on remuneration. The assessee vide its letter dated 08.11.2011

replied the queries of Assessing Officer. The assessee contended that the

assessee is engaged in the business of sub-letting of immovable property

and accordingly various expenditure incurred ought to be allowed. In the

Assessing Officer’s letter/ quarries dated 28.10.2011 there was no mention

of disallowance of expenses under section 40A(2) for treating the same as

excessive, unjustified and not incurred wholly and exclusively for the

purpose of business. The assessee furnished the copy of appointment letters

of Dr. Gita Piramal dated 06.05.2005 along with educational qualification.

The ld. AR of the assessee submits that Dr. Gita Piramal is Chairman &

Managing Director of the assessee-company who is India’s premier office

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furniture maker. She is pioneer of Modern Modular furniture in India. She

is also Chairman of ERGO India’s premium office furniture maker. Under

her leadership in 2008 ERGO became first office furniture maker in Asia

Pacific Region. The office of ERGO in Mumbai whose sales branches

offices are located across the country and manufacturing facilities in

Nagpur and Himachal Pradesh. In 2004 Business Today magazine

recognized her as one of the India’s 25 most powerful women. She is also

served as Member of various Advisory Boards and Councils. 4. The ld. AR of the assessee further submits that sub-section (2) of section

40A was inserted by Finance Act 1968 w.e.f. 01.04.1968. Circular No.6-P dated 06th July 1968 issued under sub-section (2) of section 40A, states

that that no disallowance is to be made in respect of payments made to

relative and sister concern where there is no attempt to evade the tax. It

was further contended that reasonableness of any expenditure is to be just

having regard to the Fair Market Value of the goods, services or facilities

for which payment is made or legitimate need of the Business or

Profession or benefit derived by or accrued to the tax payer from the

expenditure. Such portion of expenditure in the opinion of Income Tax

Officer/Assessing Officer is excessive or unreasonable accrued to these

criteria is to be disallowed in computing the profit of the Business or

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Profession. It was further submitted that the categories of person, payment

to whom falls within the purview of this provision comprises inter alia; any

relative of the tax payer, where the tax payer is a company, firm,

association or person or HUF, and Director of the company etc. The

purpose of insertion of these provisions is meant to check evasion on tax

through excessive or unreasonable payment to relatives and associate

concern and should not be applied in a manner which will cost hardship to

bonafide case. The provision of section 40A(2) is not applicable in case of

company in respect of expenditure incurred in section 40A(2)(b)(i), i.e.

relating to remuneration benefit and amenities to Director of company or

relative of such Director or person. The ld. AR of the assessee vehemently

submits that the object of section 40A(2) is to prevent diversion of income

and to evade the tax. The assessees as well as the Directors are taxed at the

marginal rate; therefore, there is no tax evasion. In support of his

submission, the ld. AR of the assessee relied upon the decision of Hon’ble

Bombay High Court in case of CIT vs. V.S. Dempo & Co. Pvt. Ltd. 336

ITR 209 (Bom) and CIT vs. Indo Saudi Services (Travel) Pvt. Ltd. 310

ITR 306 (Bom).

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allowed to the assessee in other years except Assessment Year 2009-10 &

2012-13 for which the appeal are pending. 6. On the other hand, the ld. DR for the Revenue supported the order of

authorities below. The ld. DR for the Revenue submits that the

remuneration paid to Directors is excessive and the assessee has not proved

the services rendered by Directors or her active participation in the

business of assessee. The expenses incurred by assessee on remuneration

were not proved as that the same was wholly and exclusively for the

purpose of business. During the year only one property was let out by the

assessee. For the disallowance of rent free accommodation it was argued

by ld DR that no such accommodation was provided to the other director.

The rent free accommodation expenses were substantially increased from

the preceding year. No justification was explained by the assessee. 7. We have considered the rival submissions of the parties and perused the

material available on record. During the assessment the Assessing Officer

noted that the assessee has shown rental income of Rs. 5,37,82,500/- from

subletting. The assessee claimed deduction of remuneration of two

directors namely Dr. Gita Piramal of Rs. 36 lakhs and Ms. Aparana

Piramal of Rs.15 lakhs. Further the assessee has provided rent free

ITA No. 3471/M/12 & 4977/M/16- Trimode Properties Pvt. Ltd.

accommodation to Dr Gita Piramal, of which the assessee paid Rs.1.69

Crore. The perquisite value taxed in the hands of Director is merely of

Rs.5,40,000/- only. The AO issued show cause notice dated 31.07.2011 to

the assessee to establish the reasonable of the payments made to the

persons. The AO recorded that the assessee not furnished reply. The

assessee along with its letter dated 17.08.2011 furnished the details of the

property let out and the dates of letting of the property in the following

manner;

Sr.No. Name of sub-tenant Date of Rent pm(Rs.) Sub-let 1 M/s. Kone Elevators P. Ltd 01.09.2005 3,73,750/-

2 M/s BP Ergo Ltd. 27.06.2005 14,00,00/-

3 M/s. Tata Motors Ltd. 01.01.2006 16,10,000/-

4 M/s Bajaj Alliance General Ins Co. 24.04.2008 13,50,000/- Ltd.

that three parties were already tenant on the date of appointment of Dr.

Gita Piramal as Director. The Role of Dr. Gita Piramal is not explained by

the assessee. The business of the assessee is to let out property , during the

previous year the assessee has sub-let only one property and remaining 9

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three property were already let-out, therefore such huge expenses is not

justified. The AO treated the remuneration to Directors and rent free

accommodation as excessive and unjustified and not wholly and

exclusively for the purpose of business. The AO disallowed the 50% of

Director’s remuneration and on rent free accommodation. 9. The ld. CIT(A) confirmed the addition/disallowance holding that assessee

could not explain the nature of service rendered by Dr. Gita Piramal. The

renting of property does not require any specific skill and that Dr. Gita

Piramal is Director in both the companies i.e. let out and to whom the

property is let out. The free accommodation provided to Dr. Gita Piramal

has gone up from Rs.68,19,194/- to Rs,1,69,20,000/- in this year. No such

rent free accommodation is provided to Aparana Piramal. Further, Dr. Gita

Piramal is Director in M/s BP Ergo Ltd, Kemp & Co but no such salary or

rent free accommodation is provided from such entities. The area of

qualification of Director in Furnishing and Fixtures, Media Management

and not in property dealings. On the basis of his above referred observation

the ld CIT(A) confirmed the disallowances on account of Directors

remuneration as well as for rent free accommodation.

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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 or the benefit derived by or accruing to him there from, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." 11. The Hon'ble jurisdictional Bombay High Court in the case of CIT Vs. Indo

Saudi Services (Travel) (P) Ltd (supra), while referring the Circular issued

by CBDT No. 6-P, dated 6th July, 1968 held that no disallowance is to be

made under section 40(2)(a) in respect of payment made to related party

where there is no attempted to evade the tax.

ITR 271 (Mad) held that Section 40A(2)(a) contemplates is that there

should be some material available before the Assessing Officer for

invoking Section 40A(2)(a) to initiate action to disallow or refuse to deduct

the excessive or unreasonable expenditure mentioned there under. But, at

the same time, before taking any final decision by invoking the power

under Section 40A(2)(a), either allowing or disallowing such expenditure

incurred as excessive or unreasonable, such decision of the Assessing

Officer should be based on reasons well- founded, which are judiciously

acceptable.

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assessee debited expenses on account of salary of the two Directors and

expenses of rent free accommodation of one Director. Further, there is no

dispute that both the person for whom the assessee has shown expenses are

persons referred in section 40A(2)(b) of the Act. The issue for our

adjudication is whether the payments so made on account of salary and the

rent free accommodation are excessive or unreasonable having regards to

the fair market value of the services for which the payments are made. In

our view the disallowance under section 40A(2)(a) is not absolute, but

subject to the satisfaction of the conditions provided in that section.

Further, what is required to be disallowed is the excessive or unreasonable.

We have noted that the AO has simply disallowed the 50% of the salary

paid to the Directors and 50% of rent paid for the accommodation of one

director holding that the assessee has sub-let only one property and

remaining three property were already let-out, therefore such huge

expenses is not justified. The AO has not brought any contrary material to

prove that the payments made were excessive or unreasonable. No such

disallowance was made by AO in earlier AY’s i.e. in AY 2006-07, 2007-08

& 2008-09 as well as subsequent year i.e. in AY 2011-12 on similar set of

facts.

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section 40A(2) is to prevent diversion of income and to evade the tax. It

was canvassed that the assessee as well as the Directors are taxed at the

marginal rate; therefore, there is no tax evasion. This fact is not in dispute

that the assessee as well as the Directors of the assessee to whom the

payments of salary were paid is taxed at marginal rate. The Hon’ble

Bombay High Court in CIT Vs V.S Dempo and Co. P.Ltd (supra) held that

the assessees as well as its subsidiary were in the same tax bracket and paid

the same rate of tax was a fact which assumed importance. Admittedly it

was not a case of tax evasion. We are also in agreement with the

submissions of the ld. AR for the assessee that the subsection (2) of section

40A to check the evasion of tax through excessive or unreasonable

payments to relative and associate and should not be applied in a manner

which may cause hardship in bonafide cases. Admittedly the lower

authorities have not identified any comparable salary and failed to establish

that remuneration paid to directors were excessive, when it was allowed in

earlier assessment years. Similarly, while making disallowance of 50% of

salary of directors and rent of accommodation one of the director, the

assessing officer as well as ld CIT(A) has not specified the justification of

such disallowance. Considering the above factual and legal discussion, we

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are of the view that the lower authorities were not justified in making 50%

of disallowance of salary of two directors and expenses of rent of

accommodation of one of the director. Hence, we direct the AO to delete

the disallowance. In the result the ground No. 1(a) to 1(c) are allowed. 15. Ground No. 2(a) &(b) relates to disallowance of depriciation claimed on

motor car. The ld. AR for the assessee submits that the motor car is in the

name of the assessee and was used for the purpose of the business by the

director of the assessee. The AO disallowed depriciation by taking view

that car is used for personal purpose of directors. All the conditions of

section 37 are fulfilled. There was no justification in disallowing

depriciation on motor car. 16. On the other hand the ld. DR for the revenue supported the order of the

authorities below. 17. We have considered the rival submissions of the parties and have gone

through the orders of the authorities below. The AO during the assessment

took his view that the business of the assessee was already set-up and that

the only activity undertaken by the assessee was subletting of the property.

The car has no role for the purpose of the business of the assessee and

accordingly disallowed the depriciation of Rs. 14,15,113/-. The ld CIT(A)

confirmed the action of AO on the basis of his view taken for confirming

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the disallowance of rent of accommodation and salary of directors. We

have noted the lower authorities have not disputed the car is under the

ownership of assessee company. The assessee is corporate entity and there

is no such personal element involved in such deduction. Moreover, on the

basis of which the lower authorities based their action, has been set-aside

by us. The deduction claimed by the assessee is not capital in nature. The

lower authorities made the disallowance by adopting unjustifiable reasons.

Hence, we direct the AO to allow the depriciation. In the result these

grounds of appeal are allowed. 18. Ground No. 3 is repetition of earlier grounds of appeal, which we have

already allowed, thus, this ground of appeal needs no specific adjudication. 19. In the result the appeal of the assessee is allowed.

ITA No.4977/M/2016 for AY 2012-13 20. Ground No. 1 relates to disallowance of directors remuneration. As

recorded earlier this ground of appeal is identical to the ground No. 1(a) in

appeal for AY 2009-10, which we have allowed. Therefore, following the

principle of consistency this ground of appeal is allowed with similar

direction. 21. Ground No. 2 relates to depriciation on motor car. This ground of appeal

is identical to the ground No.2 of the appeal for AY 2009-10, which we

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have allowed. Therefore, following the principle of consistency this ground

of appeal is allowed with similar direction.

Order pronounced in the open court on 26/06/2019.

Sd/- Sd/- G.S. PANNU PAWAN SINGH ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 26.06.2019 SK Copy of the Order forwarded to : 1. Assessee 2. Respondent 3. The concerned CIT(A) 4. The concerned CIT 5. DR “F” Bench, ITAT, Mumbai 6. Guard File BY ORDER, Dy./Asst. Registrar ITAT, Mumbai