ACIT 3(1)(1), MUMBAI vs. ARYSTA LIFESCIENCE INDIA LTD, MUMBAI

Per Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid cross-appeal for Assessment Year [AY] 2011-12 contest the order of Ld. Commissioner of Income-Tax (Appeals)-12 [CIT(A)], Mumbai, Appeal No.CIT(A)-12/IT36/ACIT 6(1)(1)/2014-15 dated 02/11/2015 on separate grounds of appeal

. The assessee is aggrieved by confirmation of disallowance of certain incentives paid to the dealers amounting to Rs.233.84 Lacs. The revenue has raised the following effective grounds of appeal:-

1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs.3,01,15,384/- made by the A.O. on account of gratuity and leave encashment payments to two Directors u/s.37(1) / 40A(2)(a) of the Act without appreciating the fact that the assessee has not brought anything on record to show the payments were reasonable in terms of provision of section 40A(2)(a) of I.T.Act or that the amounts were spend wholly and exclusively for the purpose of business and the quantum of disallowance was based on the submission made by the assessee.

2. Without prejudiced to the above, whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition made by the Assessing Officer in respect of gratuity payment to the directors, in-spite of admitting that the assessee has not created any gratuity fund and made direct payment of gratuity to the directors, which is in contravention to the provision of section 36(1)(v) of the I.T.Act which allows deduction on account of gratuity only if it is paid to an approved gratuity fund.

3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the ad-hoc disallowance made by the A.O. on account of sale of land amounting to Rs.4,48,79,000/- without appreciating the fact that despite of providing opportunity to the assessee to submit the requisite details, the assessee could not produced the same and, therefore, the Assessing Officer was completely justified in estimating the sale consideration at Rs.5 Crore.

The assessment for impugned AY was framed by Ld. Deputy Commissioner of Income Tax-6(2), Mumbai [AO] u/s 143(3) of the Income & 559/Mum/2016 ArystaLifescience India Limited Assessment Year-2011-12 Tax Act, 1961 on 13/03/2014 wherein the income of the assessee has been assessed at Rs.36.02 crores after certain additions / disallowances as against returned income of Rs.26.15 crores filed by the assessee on 30/09/2011. The assessee being resident corporate entity was engaged in the business of Agro Chemical Products during impugned AY. 2.1 As evident from grounds of appeal raised in the cross-appeals, the following quantum additions are the subject matter of appeal before us:- No. Nature Amount (Rs.)

1. Disallowance out of Remuneration to Directors 3,01,15,384/-

2. Disallowance out of incentives to dealers 2,33,84,000/-

3. Disallowance on account of sale of land 4,48,79,000/- 2.2 Facts qua the first issue are that during assessment proceedings, it was noted that the assessee paid remuneration to two directors namely Prem A.Devidayal & Shri Ramkishan A.Devidayal aggregating to Rs.422.36 Lacs as against Rs.182 Lacs paid in the immediately preceding AY and the same, in the opinion of Ld. AO, was excessive within the meaning of Section 40A(2)(a). The assessee defended the same vide reply dated 05/03/2014, inter-alia, by submitting that besides remuneration, the abovementioned payments included gratuity and leave encashment paid to the two directors and there was no increase in the remuneration during impugned AY. However, not convinced, Ld. AO opined that the same could not be allowed within the meaning of Section 37(1) and 40A(2)(a). It was further noted that commission paid to two directors in earlier years was disallowed for non-deduction of Tax At source and therefore, the assessee & 559/Mum/2016 ArystaLifescience India Limited Assessment Year-2011-12 has changed the nomenclature of the payment to pay hefty sums to the directors. The Ld. AO further opined that disallowance of the same u/s 40(a)(ia) also could not be ruled out since no details, in this respect, were submitted by the assessee. Finally, the amount of gratuity and leave encashment aggregating to Rs.301.15 Lacs was disallowed in the hands of the assessee. 2.3 The second addition pertains to certain incentive & selling expenses paid by the assessee to its dealers during the impugned AY. It was noted that the assessee debited incentives of Rs.467.68 Lacs under the head Selling & Distribution Expenses and accordingly, the details of the same were sought from the assessee. The assessee, while submitting the soft copy of ledger account, submitted that the same was in the nature of reimbursement of expenses to dealers incurred by them at field level for promoting the products of the company and the same were in the nature of local travelling, conduct of field camps, posters, banners etc. & discount on sales to them. However, Ld. AO, finding that the assessee failed to submit consolidated party-wise details of incentives and also failed to demonstrate compliance of TDS provisions against the same, disallowed the same to the extent of 50% which resulted into impugned addition of Rs.233.84 Lacs in the hands of the assessee. 2.4 The last addition arises out of sale of several plots of land stated to be sold by the assessee during impugned AY for Rs.51.21 Lacs as against indexed cost of acquisition of Rs.27.20 Lacs, giving rise to Long Term & 559/Mum/2016 ArystaLifescience India Limited Assessment Year-2011-12 Capital Gains of Rs.24 Lacs. Since the assessee failed to submit requisite details as called for by Ld. AO vide notice u/s 142(1) dated 29/11/2013, the Ld. AO estimated the sales consideration of the said plots as Rs.5 Crores and after adjusting the sales consideration of Rs.51.21 Lacs already reflected by the assessee, the balance amount of Rs.448.79 Lacs was added to the income of the assessee under the head Income from Other Sources. 3.1 Aggrieved, the assessee contested the same with partial success before Ld. first appellate authority vide impugned order dated 02/11/2015 wherein the disallowance against remuneration to directors stood deleted by making following observations in para-7:- It is seen that the AO has inadvertently considered the gratuity paid as leave encashment and vice versa. The correct gratuity and leave encashment paid to the two directors are as under:- Particulars Ram Devidayal Prem Devidayal Gratuity Rs.1,38,46,154/- Rs,1,35,00,000/- Leave encashment Rs. 13,84,615/- Rs.13,84,615/- 7.1 The payment of Gratuity Act, 1972 is applicable to the entire country and applies to every factory and is payable to all employees who have rendered a continuous employment of five years at the time of their superannuation or retirement or resignation or death or disablement. The Gratuity Act provides for the formula for calculating the amount of gratuity based on the total number of completed years of service. It is seen that the Gratuity Act is applicable to the applicant since it operates a factory that is manufacturing agrochemicals. Both Ram Devidayal and Prem Devidayal have been employed for nearly 40 years and are definitely entitled to payment of gratuity. It is also seen that the A.O. has invoked Section 40A(7) and Rule 102 to disallow the gratuity payment. However, it is seen that such disallowance is misplaced since Section 40A(7) is applicable only for provision for gratuity and not actual payment of gratuity. Similarly rules 98-111 of the I.T.Rules deal with setting up and administration of gratuity funds. Here, it is seen that the appellant company has not set up a gratuity fund but has made a direct payment of the gratuity amount to the two directors on termination of the contract. Thus, such disallowance of gratuity paid is incorrect and therefore deleted. Similarly, both the directors are also entitled to leave encashment of Rs.13,84,615/- each, which is commensurate with the remuneration drawn by them. It is not a hefty & 559/Mum/2016 ArystaLifescience India Limited Assessment Year-2011-12 sum as held by the A.O. The A.O. had inadvertently made the mistake of wrongly taking the gratuity as leave encashment and so he had said that it was a “hefty sum”. Both are entitled to 60 days of leave encashment which has been granted to them. The AO’s alternate view that application of section 40(a)(ia) may also arise is not tenable since the provisions of section 40(a)(ia) are not applicable on salary payments. However, it is also seen that the appellant has deducted tax on the payment of gratuity and leave encashment to both the directors. Thus, in the light of the discussion here, ground of Appeal No. 1 & 2 are allowed.

3.2 The Ld. Auhtorized Representative for Assessee [AR], Shri Dhinal Shah submitted that the Ld. CIT(A) dealt with the issue in the correct perspective whereas Ld. Departmental Representative [DR], Shri Rajesh Kumar Yadav, placed reliance on the stand of Ld. AO. 3.3 We have considered the orders of lower authorities and submissions made before us in this regard. After due consideration, we agree with the stand of Ld. CIT(A) that the provisions of Section 40A(7) were applicable only for provision of gratuity and not to actual payment of gratuity. Secondly, due TDS has been deducted by the assessee against these payments which is evident from Form No.16 issued to the two directors, the copies of which have been placed on record. The Ld. CIT(A), in our opinion, has clinched the issue in correct perspective and therefore, we find no infirmity in the order of Ld. first appellate authority. Ground Numbers 1 & 2 raised in revenue’s appeal stands dismissed. 4.1 The addition on account of sale of plots has been deleted by Ld. CIT(A) by observing that the assessee sold all the plots at prevailing market value and the additions were made purely on guesswork and surmises. Aggrieved, the revenue is in further appeal before us. The Ld. AR has & 559/Mum/2016 ArystaLifescience India Limited Assessment Year-2011-12 submitted that all the sale deeds and other documents were filed by the assessee before Ld. CIT(A), who with due application of mind, allowed the claim of the assessee. It is further submitted that the provisions of Section 50C were not applicable since all the properties under question were sold at much higher value than the stamp duty value. Per Contra, Ld. DR, submitted that the assessee failed to file any documents in this regard and Ld. CIT(A) admitted additional evidences without confronting the same to Ld. AO in violation of Rule 46A. 4.2 Upon careful consideration, we find that Ld. AO has estimated the sale consideration keeping in view the fact that the assessee failed to submit any details / documents to substantiate his claim with respect to Long Term Capital Gains earned by the assessee during impugned AY. The Ld. First appellate authority has deleted the same by observing that additions could not be made merely on pure surmise and guesswork. We find that all the sale transactions are with respect to immovable properties which are duly evidenced by the sale deeds executed by the assessee during the impugned AY. The primary onus of substantiating the sale consideration rested with assessee and assessee failed to supply the requisite information before Ld. AO. Keeping in view the aforesaid fact and keeping in view the submissions made by Ld. AR that the provisions of Section 50C were not applicable to these transactions, we remit the matter back to the file of Ld. AO for appreciation of aforesaid facts and re- adjudicate in the light of submissions made by Ld. AR. The assessee, in & 559/Mum/2016 ArystaLifescience India Limited Assessment Year-2011-12 turn, is directed to supply the requisite documentary evidences and explanation to substantiate the same. Consequently, this ground of revenue’s appeal stand allowed for statistical purposes. Resultantly, the appeal of the revenue stand partly allowed for statistical purposes. 5.1 The assessee, in his appeal, has contested the confirmation of adhoc disallowance of 50% on account of incentives paid to dealers. We find that the assessee, before Ld. CIT(A), filed detailed break-up of the same which are extracted in para-10 of the impugned order and justified the payment thereof. However, not convinced with assessee’s explanation, Ld. CIT(A) confirmed the additions by observing as under:- This relates to disallowance of Rs.2.33 Crores at 50% of total expenditure of Rs.4.67 crores claimed towards incentives to dealer made by the AO for lack of evidence. In para 8 (page 8-9) of assessment order the AO has very clearly brought out the facts as to why the amount of Rs. 2.33 is disallowed. The appellant has not submitted the consolidated party wise details giving name of dealers, their addresses, PAN, details of total sales made, the amount of incentives made and also the basis of calculation of such incentives. Then the AO has come to the conclusion that the appellant has debited bogus expenditure to avoid payment of taxes and so he has disallowed 50% of such expenses. During appellate hearing the appellant has stated that expenses of Rs. 4.67 crores has been made under various heads as under:- Sr. Nature of expenditure incurred Amount Rs.

No. 5 is dismissed. Aggrieved, the assessee is in further appeal before us. 5.2 The Ld. AR has contended that adhoc disallowance could not be made since the impugned expenditure was a regular feature for assessee’s business and the same was duly supported by the credit notes and paid pursuant to agreement with the dealers. It is also submitted that similar payments made by the assessee either in earlier years or succeeding years has been accepted by the revenue and therefore, the disallowance was not justified. The Ld. AR also drew attention to the fact that the aforesaid expenditure constitutes merely 2% of the total turnover reflected by the assessee during impugned AY. Per Contra, Ld. DR submitted that the assessee failed to supply the requisite information as called for by Ld. AO during proceedings and therefore, the disallowance was justified. & 559/Mum/2016 ArystaLifescience India Limited Assessment Year-2011-12 5.3 We have carefully heard the rival contentions and perused relevant material on record. It is an undisputed fact that the assessee is a corporate entity whose books of accounts are subjected to audit under the Companies Act as well as under the Income Tax Act. The assessee’s books of accounts have not been rejected and no defects have been pointed out in the same. Under such a scenario, the adhoc disallowance, as sustained by lower authorities, in our opinion, was not justified particularly in view of the ratio of judgment of Hon’ble Supreme Court rendered in Dhakeshwari Cotton Mills Ltd. Vs. CIT [26 ITR 775]. At the same time, the onus to substantiate the same squarely rested on the assessee to demonstrate that the expenses were actually incurred and secondly, the same were incurred for the business purposes of the assessee in terms of Section 37(1). The Ld. AR has placed on record the supporting material in the shape of sample copy of incentive schemes, turnover discount guidelines, credit notes, sample invoices for purchase of gifts / freebies etc. which, prima facie, lend the support to the arguments raised by Ld. AR. Therefore, we deem it fit to remit the matter back to the file of Ld. AO to re-appreciate the evidences being submitted by assessee and re-adjudicate the same as per law with a direction to the assessee to provide requisite details / documentary evidences to substantiate his claim failing which Ld. AO shall be at liberty to decide the same on the basis of material available on record. The assessee’s appeal stands allowed for statistical purposes. & 559/Mum/2016 ArystaLifescience India Limited Assessment Year-2011-12 Conclusion

6. The revenue’s appeal stand partly allowed for statistical purposes whereas the assessee’s appeal stands allowed for statistical purposes.