ACIT 31(1), MUMBAI vs. GUNDECHA BUILDERS, MUMBAI

PER PAWAN SINGH, JUDICIAL MEMBER; 1. This appeal by revenue is directed against the order of ld. Commissioner of Income Tax (Appeals)-42 [the ld. CIT(A)], Mumbai dated 29.06.2017 for Assessment Year 2012-13. The revenue has raised the following grounds of appeal:

2. " Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance on account of excess salary paid of Rs. 12,21,267/- by stating that the same employees had been with assessee in 1 Mum 2017-M/s Gundecha Builders

the part also, without appreciating the merits of the case that the assessee failed to prove these persons were employee of assessee and the assessee neither furnished any appointment letter nor had it furnished address of said employed persons. 2. Brief facts of the case are that the assessee is a registered partnership firm engaged in the business of development and construction of residential as well as commercial projects, filed its return of income on 20.09.2012 declaring total income of Rs. 7.54 crore. The return of income was selected for scrutiny and assessment was completed under section 143(3) of the Act.

The Assessing Officer while passing the assessment order besides the other additions /disallowance treated the income from house property as “Income from Business and Profession” and made adhoc disallowance of 50% of salary paid to three employees. On appeal before the ld. CIT(A), the action of Assessing Officer was reversed. Thus, aggrieved by the order of ld. CIT(A), the revenue has filed the present appeal before this Tribunal.

raised by revenue.

8. In the result, Ground No.1 of the appeal is dismissed.

9. Ground No.2 relates to adhoc disallowance of salary of Rs. 12,21,267/-. The ld. DR for the revenue supported the order of Assessing Officer. The ld. DR further submits that the assessee has debited a sum of Rs. 24,42,535/- on account of salary paid to employees namely Mahendra K. Jain, Gopal Sharma and Lalit V. Jain. The Assessing Officer has not carried out any project from last several years. Therefore, the Assessing Officer after issuing show-cause notice to substantiate the expenses of salary paid to the employee when the assessee has not under taken any work. The assessing officer after considering the reply of assessee rightly concluded that assessee failed to prove that these persons were in the employment of assessee. The assessee 4 Mum 2017-M/s Gundecha Builders failed to prove their employment with the assessee. The Assessing Officer made a reasonable disallowance.

10. On the other hand, the ld. AR of the assessee submits that Assessing Officer made addition on mere assumption and presumption based all three employees namely Mahendra K. Jain, Gopal Sharma and Lalit V Jain were employee in preceding years. The Assessing Officer has not disallowed any such expenditure on account of salary paid to those employees. The observation of Assessing Officer that there was no income from the sales of housing project and hence, these expenses neither were nor required. As a matter of fact, the observation of Assessing Officer is wrong. The assessee has sold the flats earned income of Rs. 2.04 crore. There is no dispute that assessee paid salary for regular course of business. It is not the jurisdiction, the Assessing Officer to decide the fact whether the assessee-firm should incur the expenses or not for carrying its business. It is the discretion of businessmen as to whether any expenditure should be incurred on the cost of employee or not. In support of his submission, the ld. AR of the assessee relied upon the decision of Hon’ble Supreme Court in case of Hero Cycles Pvt. Ltd. [2015] 379 ITR 347 (SC)], wherein it was held that once it is established that there is nexus between the expenditure and purpose of business, revenue cannot justifiable claim to put itself in the Arm Chain of businessmen and to assume the role of Board of Director to decide how much reasonable expenditure be made. The ld. AR of the assessee further submits 5 ITA No. 6053 Mum 2017-M/s Gundecha Builders that there must be adverse material on record to dispute the expenses. The addition cannot be made on the basis of presumption and assumption. The Assessing Officer disallowed 50% of salary. However, the balance salary was not disputed. The disallowance of 50% of salary was not based on any scientific method or by specifying a defect. In support of his submission, the ld. AR of the assessee further relied upon the decision of CIT vs. Roman & Co. [1986] 67 ITR 11 (SC), CIT vs. Calcutta Discount Co. Ltd. [1973] 91 ITR 8(SC), Omar Salay Mohamed Sait vs. CIT [1995] 37 IR 151 (SC), Dhirajlal Girdharilal vs. CIT [226 ITR 734 (SC)], Dr. Anita Sahai vs. DIT [266 ITR 597 (All)] and MODI Creations Pvt. Ltd. vs. Ito [2011] 13 taxmann.com 114 (Delhi)]. The ld. AR also furnished the copy of From-16 of Mahendra K. Jain, Gopal Sharma and Lalit V Jain along with slip of contribution of Employment Provident Fund (EPF).

11. We have considered the rival submission of the parties and gone through the orders of authorities below. We have also deliberated on various case laws relied by lower authorities and ld. representative of the parties. The Assessing Officer made addition on taking view that assessee has not furnished appointment letter or address of the employee. The Assessing Officer concluded that the income of assessee-firm mainly from Income from House Property and Interest and has sold 1-2 property during the year. Keeping in view the activities of the assessee, the Assessing Officer treated the salary of three employees as huge salary and disallowed 50% (i.e. 50% of Rs. 6 Mum 2017-M/s Gundecha Builders 24,42,535/-). The ld. CIT(A) deleted the addition holding that the Assessing Officer made addition on adhoc basis. The ld. CIT(A) observed that the same employees were working with the assessee in past years and their salary have not been disputed by Assessing Officer. The assessee’s own certain litigated properties in its work-in-progress which also infers that assessee would need a managerial level of employees and that Assessing Officer cannot step into shoes of the assessee and deleted the disallowance.

The ld AR for the assessee also furnished the Form-16 of Mahendra K. Jain, Gopal Sharma and Lalit V. Jain along with copy of EPF contribution.

Moreover, the Assessing Officer has admitted the employment of all three employees by allowing 50% of the salary. The disallowance of salary is not based on any scientific method. Once the employment admitted by allowing 50% salary, the Assessing Officer has no right to dispute the quantum of salary in absence of any material or evidence on record. The Hon’ble Supreme Court in Hero Cycles Pvt. Ltd. (supra) held that once it is 7 Mum 2017-M/s Gundecha Builders established that there is nexus between the expenditure and purpose of business, the revenue cannot put itself in the Arm Chair of businessmen or in a position of Board of Director to assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case.

Order pronounced in the open court on 21/06/2019.