DEPUTY COMMISSIONER OF INCOME-TAX vs. M/S. INDO ENTERPRISES, LATUR

आदेश आदेश / ORDER आदेश आदेश

PER D. KARUNAKARA RAO, AM :

This appeal is filed by the Revenue against the order of CIT(A)-2, Aurangabad, dated 31-03-2016 for the Assessment Year 2011-12.

of the Act – Rs.58,29,210/-; (3) disallowance of Expenses u/s.40A(3) –

Rs.75,910/-; and (4) disallowance of Advertisement Commission,

Advertisement Expenses, Distribution Expenses and Honorarium paid –

Rs.31,44,357/- on adhoc basis. We shall narrate the facts relating to

each of the additions in the succeeding paragraphs.

2.1 Regarding the issue of addition u/s.40A(2)(b) of the Act, i.e.

payment of salary to the Directors namely, (a) Mr. Amit V. Deshmukh; (b)

Ms.Vaishali V. Deshmukh; (c) Mr. Dhiraj V. Deshmukh; and (d) Mr. Ritesh

V. Deshmukh, the AO held that the payment made to them are excessive

and unreasonable within the meaning of section 40A(2)(b) of the Act. AO

held that payment of salary of Rs.1 lakh per month each in respect of 3

Directors (3 x Rs.12 lakhs) is reasonable. Thus, the AO allowed only

Rs.36 lakhs in respect of 3 Directors and disallowed the balance of

Rs.1,56,50,000/- (Rs.1,92,50,000 – Rs.36,00,000). AO did not disturb the

remuneration paid to Mr. Ritesh V. Deshmukh. Further, the AO reasoned

that the payment of Rs.1,92,50,000/- is paid to the 4 Directors against

Rs.1,19,46,236/- paid to 183 employees of the company is too excessive

and unreasonable.

2.2 Regarding the addition on account of interest chargeable on account

of interest free advances made by the AO invoking the provisions of

section 36(1)(iii) of the Act, AO held that for charge of interest income

@12% on such advances given by the assessee. Assessee gave such

advances to the tune of Rs.4.86 crores (rounded off).

2.3 Regarding the disallowance made by the AO on account of Transport

and Octroil/Expenses u/s.40A(3) of the Act, the AO held that the same constitutes the contravention to the provisions of section 40A(3) of the Act.

Thus, an amount of Rs.75,910/- was added by the AO.

2.4 Regarding the disallowance made by the AO on account of

Advertisement Commission, Advertisement Expenses, Distribution

Expenses and Honorarium paid u/s.40A(3) of the Act, the AO examined

the payment and came to the conclusion that the claims by the assessee

in the year under consideration is high when compared to the earlier

years. Therefore, on adhoc basis, the AO restricted the claim to 50% of

the amount of difference between the figures of claims in current and

earlier year. AO provided a comparative chart and disallowed

Rs.31,44,357/-. The discussion given in Para No.6 of the assessment

order is relevant.

before the CIT(A). The decision of the CIT(A) on each of the above

additions is discussed in the succeeding paragraphs.

3.1 Regarding the remuneration paid to the Directors, the CIT(A) relied

on the judgment of Hon’ble Jurisdictional High Court in the case of Indo

Saudi Services Travel Private Limited 310 ITR 306 (Bom.) and submitted

that the AO failed to demonstrate the applicability of the provisions of

section 40A(2)(b) of the Act. Further, CIT(A) reasoned that the addition is

based on conjectures and surmises and the same is not conceptualised in

these provisions. He accordingly deleted the additions as per the

discussion given in Para Nos. 13 to 15 of the order of CIT(A).

3.2 Regarding the addition of Rs.58,29,210/- on account of notional

interest @12% on the interest-free advances given by the assessee, the

CIT(A) held that the same constitutes notional addition. Accordingly, CIT(A) deleted the same. The discussion given in Para Nos. 16 to 19 of the

order of CIT(A) is relevant.

3.3 Regarding the addition made by the AO u/s.40A(3) of the Act on

account of Transport and Octroi expenses, the CIT(A) dismissed the said

ground as the same was not pressed before him.

3.4 Finally, coming to the adhoc disallowance of Rs.31,44,357/- on

account of miscellaneous expenses referred above, the CIT(A) did not

appreciate the way the adhoc additions is made. The CIT(A) held that

most of the payments are made in cheques only and not in cash as

wrongly described by the AO in the assessment proceedings. Eventually,

this addition was also deleted in full.

BEFORE THE TRIBUNAL

4 Aggrieved with the relied granted by the CIT(A), the Revenue filed

the present appeal with the following grounds :

“1. Addition on account of disallowance u/s.40A(2)(b) The Ld.CIT(A) has erred in facts as well as law by deleting the addition on account of disallowance of Rs.1,51,50,000/- made by the AO u/s.40A(2)(b). The Ld.CIT(A) failed to appreciate the fact that all the directors who have been paid heavily, could not devote time to the assessee company as they are engaged in their own another activities. The Ld.CIT(A) failed to appreciate the fact that the disallowance made by the AO was based on logic and reasonableness. 2. Addition on the issue of adhoc addition The CIT(A) erred in facts as well as in law in deleting the adhoc addition made at Rs.31,44,357/-. The Ld.CIT(A) failed to appreciate the fact that the AO has pointed out the defects in vouchers such as receipt column and subject for which payments made were not mentioned in the vouchers. 3. The appellant craves leave to add, amend or alter any of the grounds of appeal.”

From the above, it is evident that the Revenue accepted the decision

of the CIT(A) on two accounts and is agitating on the rest of two issues

namely (1) disallowance u/s.40A(2)(b) of the Act and (2) Adhocism.

We shall take up the ground wise adjudication in the following

paragraphs.

account of disallowance u/s.40A(2)(b) of the Act relating to remuneration

paid to the Directors. Relevant facts are already discussed in the

preceding paragraphs of this order. AO resorted to adhoc disallowance

and held payment of remuneration @ Rs.1 lakh per month per Director is

reasonable. AO did not indicate the reasons for fixing the remuneration of

the Directors @ Rs.1 lakh per month. He has not brought any market

information/comparable instances in this regard. AO merely relied on his

own estimations unsupported by independent information/evidences for

making disallowance of Rs.1,51,50,000/-. CIT(A) discussed this issue at

length and held the ‘onus’ is on the AO in matters relating to invoking of

provisions of section 40A(2)(b) of the Act on mentioned that the assessee

discharged the primary onus. CIT(A) held that the AO should have made

use of the said information furnished by the assessee and conduced

market enquiries before quantifying the allowable remuneration to the

Directors based on the scientific data or market data or comparable cases

etc. AO has not done any of such exercise. He merely disallowed

resorting to adhocism. Therefore, the CIT(A) did not approve the addition

made by the AO and relied on the jurisdictional High Court judgment in

the case of M/s. Indo Saudi Services Travel Private Limited (supra). CIT(A)

also did not entertain the adhoc disallowance made by the AO and

described it as arbitrary and unsupported by any evidences. CIT(A)

analysed the provisions of section 40A(2)(b) of the Act and referred to

various decision in Para Nos. 10 to 12 and held against the Revenue. In

this regard, we perused the relevant order of CIT(A) and find it relevant to

extract the same. The said finding given in Para Nos. 13 to 15 of his order

reads as under :

“13. I have considered the submission made by the appellant and the observations of the A.O. The disallowance made by the A.O. u/s.40A(2)(b) is based on conjectures and surmises. He has simply disbelieved that the directors of the company would be rendering any sort of service to the assessee company. On the contrary the assessee has been able to demonstrate that specific as well as general functions were being performed by the directors which were in the interest of the long-term goals of the assessee company. Disallowance u/s.40A(2)(b) by saying that the directors could not have performed the services is not correct. Various courts have held that the AO cannot dictate to the assessee as to how the business should be done. Hon'ble ITAT in the case of Binit Corpn. v. ITO [1986] 25 Taxman 238 (Ahd.)(Mag.) has after considering various judicial pronouncement stated that first of all the AO has to satisfy himself whether the expenditure itself is genuine or not and if it is genuine then for the purpose of finding out the portion of disallowance he shall have to find out the fair market value of the services and this would presuppose that services are commonly available for which market value can be known. Thereafter, the AO shall have to evaluate the legitimate needs of the business at a point of time when the services were rendered and this would involve in inquiry as a businessman because in times of dire need services are obtained even at higher cost, the ultimate aim being to earn profit or to maintain the business relations. According to the ITAT, the AO shall have to find out what benefit is derived by the assessee and this would not necessarily confine to the year in question but shall have to take overall picture depending upon the facts of each case. Even the benefit accruing to the assessee shall have to be evaluated. This again may not be confirmed to the period of accounting year only and again it would not be essential that benefit must be in the revenue field. Thereafter according to the ITAT the AO shall have to give reasonable opportunity to the assessee to rebut his finding. If comparable instances of other parties are not available at least compare with earlier year, ad-hoc disallowance cannot stand the test of appeal. 14. The provisions of Section 40A(2)(b) are to be applied when the AO is of the opinion that an expenditure is excessive or unreasonable having regard to the fair market value of the services for which the payment is made. In the present case, the only reason for the impugned addition was an out in the mind of the assessing officer that it will not be possible for the directors to devote any time towards the working of the assessee company. The assessing officer has also doubted the contribution of Smt.Vaishali V. Deshmukh towards the working of the company on the ground that she is a housewife. The assessing officer has done nothing and has not confronted any of the directors to clear his doubts that they have not rendered any service in the functioning of the assessee company. But before arriving to a conclusion that the payment was excessive, the AO was expected to place on record the reason for holding such opinion. It is noted that no such comparable instance was quoted by the AO. It has also been brought to my notice that all the assessee's are in the highest tax bracket and hence there could not have been any intention to save the tax. As stated in Circular No.6-P, dated 06/07/1968, the objective behind introduction of this section is to prevent evasion of tax. If it cannot be demonstrated that there has been any evasion of tax due to such remunerations being paid, there cannot be a cause for any disallowance. It has been held in the case of Indo Saudi Services (supra) by the Honourable Bombay High Court as under: "(v) Under the CEDT Circular number 6-P dt. 6th July, 1968 it is stated that no disallowance is to be made in the s.40A(2) in respect of payments made to the relatives and sister concerns when there is no attempt to evade tax. 5. In view of the aforesaid admitted facts we are of the view that the Tribunal was correct in coming to the conclusion that the CIT(A) was wrong in disallowing half percent commission paid to the sister concern of the assessee during the asstt. yrs. 1991-92 and 1992-93. The learned advocate appearing for the appellant was also not in a position to point out how the assessee evaded payment of tax by alleged payment of higher commission to its sister concern since the sister concern was also paying tax at higher rate and copies of the assessment orders of the sister concern were taken on record by the Tribunal." 15. Thus, the totality of the circumstances demonstrates that there was no justification on the part of the AO to make such an ad hoc addition. Resultantly, I delete the addition made by the assessing officer U/s.40A(2b).”

From the above, it is clear that the CIT(A) has followed the settled

law of the land qua the provisions of section 40A(2)(b) of the Act and

deleted the addition. The reasoning given by the CIT(A), in our view, is on

sound footing and, therefore, the same is sustainable. Accordingly,

Ground No.1 raised by the Revenue stands dismissed.

Rs.31,44,357/- on account of adhoc additions out of various expenses, i.e.

Advertisement Commission, Advertisement Expenses, Distribution

Expenses and Honorarium paid.

In this regard, the case of the Revenue is that these expenses

claimed by the assessee are exorbitantly high as compared with that of the

earlier figures of the year. The difference in figures between figures of the two years works out to Rs.62,31,714. In the assessment, AO disallowed

50% of the same on adhoc basis. AO is of the opinion that these

payments are incurred in cash and the documentation maintained by the

assessee is not upto the satisfaction of the AO. However, in the First

Appellate proceedings, the CIT(A) examined the books of account and held

that the documentation maintained by the assessee is reasonable and

held that the addition made by the AO, i.e. @50% of the said expenditure,

is not sustainable. Relevant discussion is given in Para Nos. 21 to 24 of

the order of CIT(A).

page 299A of the paper book and submitted that the Advertisement

Commission was paid to 13 parties and all of the payees are borne on

income-tax records. Further, all these payments are made to them not

only by way of cheques but also the requisite TDS was done as per

relevant provisions. Therefore, the entire commission payment of

Rs.17,93,789/- should constitute genuine payments. AO’s attempt in

comparing the same with that of the earlier years is absolutely uncalled

for as facts and figures relating to business done in these years are

entirely different. Similarly, these payments was made through cheques

only. On examining the ledger extracts, and other accounts on account

of Advertisement expenditure, Honorarium Expenses etc., Ld. AR

submitted that the payments are genuine. There is no evidence to support

the AO’s allegations in the order of the AO. Thus, CIT(A) considered the

same and granted relief. We also perused the finding given by the CIT(A)

as per the discussion given in Para No.24 of his order and the same is

extracted here as under :

“24. I have given careful consideration to the manner in which the addition has been made and the submissions made by the assessee. First and foremost it requires to be stated that the assessing officer has not given any reason as to how the bills are not authentic or genuine. The assessing officer has also not quantified the amounts which were not found to be genuine and he has simply stated that most of the amounts are paid in cash and that “the cash vouchers are defective in respect of the receipt column and subjects”. He has not even stated the discrepancies which were found on the vouchers or the bills. The assessing officer has not given any specific finding as to for which of the amount of the expenses, the bills and vouchers are not verifiable. In the absence of any detail or discussion in the assessment order against the assessee, the additions/disallowances appear to be in the nature of ad hoc addition which cannot be sustained. The assessing officer has not brought our any material on record to show that the aforesaid expenses were neither bogus or were not spent for the purposes of business. Therefore, I direct the assessing officer to delete the addition made on account of advertisement commission, advertisement expenses, distribution expenses and honorarium expenses. Thus, Ground Nos.9 to 11 of appeal are allowed and the addition is deleted.”

From the above, it is evident that the CIT(A) examined the ledger

extracts, mode of payment and find that the AO erred in holding that the

cash vouchers are defective. Eventually, the CIT(A) did not approve the

adhoc addition made by the AO adopting 50% of the differential amount

with that of the previous year. In our view also, the AO has not done

proper job and there is no incriminating material to come to the

conclusion that the claim of said expenses on all those four accounts are

sustainable. There is no case for AO to resort to the rule of adhocism in

matters of making the assessment. Therefore, we find no reason to

reverse the order of the CIT(A). Hence, we uphold the order of CIT(A) and

affirm the deletion of addition.

Order pronounced on this 19th day of September, 2018.

Sd/- Sd/- (VIKAS AWASTHY) (D.KARUNAKARA RAO) �ाियक सद� / JUDICIAL MEMBER लेखा सद� / ACCOUNTANT MEMBER पुणे / Pune; �दनांक Dated : 19th September, 2018. Satish

आदेश आदेश क� आदेश आदेश क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to : अ�ेिषत

अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. आयकर आयु�(अपील) / The CIT(A)-2, Aurangabad 3. आयकर आयु� / The Pr. CIT-2, Aurangabad 4. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे “बी बी बी” / DR ‘B’, बी 5. ITAT, Pune; गाड� फाईल / Guard file. 6.

आदेशानुसार/ BY ORDER,स आदेशानुसार आदेशानुसार आदेशानुसार

// True Copy //

Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune.