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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAJESH KUMAR
PER SAKTIJIT DEY, J.M.
Aforesaid appeal by the assessee is against order dated 22nd August 2016, passed by the learned Commissioner (Appeals)–41, Mumbai, for the assessment year 2012–13.
In grounds no.1 and 2, the assessee has challenged the disallowance made under section 40A(2) of the Income Tax Act, 1961 (for short “the Act”) in respect of salary paid to two individuals.
2 M/s. Blossom Developers 3. Briefly the facts are, the assessee a partnership firm is engaged in the business as a developer. For the assessment year under dispute, the assessee filed its return of income on 20th September 2012, declaring total income of ` 24,72,577. In the course of assessment proceedings, the Assessing Officer while verifying the accounts of the assessee found that an amount of ` 1,58,40,500, was debited towards salary paid to staff. After calling for and examining the details of salary paid, he found that an amount of ` 65 lakh each was paid to Smt. Anagha D. Joshi and Smt. Wilma D’Souza who are wives of the partners. Therefore, he called upon the assessee to prove the reasonableness of such payment in the context of section 40A(2)(a) of the Act as the persons to whom the payments were made are covered under the said provision. In reply, it was submitted by the assessee that Smt. Anagha D. Joshi, a commerce graduate having 20 years of experience was looking after the accounts and administrative work of the firm and Smt. Wilma D’Souza also a commerce graduate was having 22 years of experience and looking after the accounting and administrative supervision of the firm. However, the Assessing Officer did not find merit in the submissions of the assessee. He observed that the turnover of the firm during the year was ` 9,44,51,000, and the firm has also debited salary to partners. He observed, considering the nature of work and turnover of the work, the payments made to the concerned persons are excessive
3 M/s. Blossom Developers and unreasonable. Thus, he was of the view that considering the nature of work done by the concerned persons, the amount of salary payable to them can reasonably be estimated at ` 8 lakh each. Thus, the differential amount of ` 1,14,00,000 was disallowed under section 40A(2) of the Act. Assessee challenged the disallowance before the first appellate authority.
The learned Commissioner (Appeals) after considering the submissions of the assessee in the context of facts and material on record found that in the immediately preceding assessment year i.e., A.Y. 2011–12, both these individuals were paid salary of ` 24.50 lakh each and in the assessment year before that they were paid salary of ` 12 lakh each. The learned Commissioner (Appeals) observed, the assessee did not bring any material on record to justify the unusual rise in salary paid to these two individuals in the impugned assessment years. He observed, the assessee also failed to demonstrate that in the impugned assessment year there were unusual additions in the duties and responsibilities of these two individuals to justify increase in salary. At the same time, the learned Commissioner (Appeals) did not agree with the quantum of salary estimated by the Assessing Officer considering that the salary paid in the preceding assessment years were allowed in scrutiny assessments. Thus, ultimately, the learned Commissioner (Appeals) held that salary
4 M/s. Blossom Developers payment of ` 30 lakh to each of the two individual employees would be reasonable insofar as it relates to the impugned assessment year. Thus, he restricted the disallowance under section 40A(2) of the Act to ` 70 lakh. While the Department has accepted the aforesaid decision of the learned Commissioner (Appeals), the assessee has challenged it before us.
The learned Authorised Representative submitted that the assessee is basically developing SRA projects and the wives of the concerned partners were working with the firm since the year 2005. He submitted that in the preceding assessment years salary paid to the concerned persons have been accepted by the Assessing Officer in scrutiny assessments which proves that the concerned persons were rendering services to the firm. He submitted, even in the impugned assessment year also the Assessing Officer has not denied the fact that the wives of the partners were rendering services to the firm. He submitted, before invoking the provisions of section 40A(2) of the Act the Assessing Officer on the basis of cogent evidence must record a categorical finding that the payment made is excessive or unreasonable having regard to the fair market value of the services. He submitted, neither the Assessing Officer nor the learned Commissioner (Appeals) have brought on record any material to demonstrate that the salary paid by the assessee to the concerned
5 M/s. Blossom Developers persons was not the fair market value of the services for which such payments were made. Therefore, he submitted that without satisfying the condition of section 40A(2) of the Act no disallowance can be made. In support of such contention, the learned Authorised Representative relied upon a number of decisions as submitted in a compilation.
The learned Departmental Representative strongly relying upon the observations of the learned Commissioner (Appeals) submitted that for the assessment year under consideration the assessee has declared income of ` 24,72,577 only. It has also paid remuneration to the partner. He submitted, when the partners themselves were being remunerated for services rendered there is no necessity for payment of such excessive salary to the persons who are related to the partners. He submitted that the payment made by the assessee to the related parties being excessive and unreasonable disallowance was rightly made invoking the provisions of section 40A(2) of the Act.
We have considered rival submissions and perused materials on record. We have also taken note of the decisions cited before us. No doubt, the disputed disallowance represents payment of salary to two individuals who are the wives of two of the partners of the assessee firm. Therefore, the persons concerned to whom the salary was paid are persons of the nature as referred to in section 40A(2)(a) r/w
6 M/s. Blossom Developers section 40A(2)(b) of the Act. Having held so, it is necessary to examine whether the disallowance made under section 40A(2)(a) of the Act can be sustained. As could be seen from the facts on record, in the previous year relevant to the assessment year under dispute, the assessee has paid salary of ` 65 lakh each to wives of the two partners. It has also been submitted before us by the learned Authorised Representative that the concerned individuals were rendering services to the firm on payment of salary since the year 2005. The aforesaid contention of the learned Authorised Representative appears to be correct considering the fact that the learned Commissioner (Appeals) has recorded a finding of fact that in the preceding assessment years, the Assessing Officer has accepted the payment of salary to these two individuals while completing scrutiny assessments. In fact, in the impugned assessment year also the Assessing Officer has accepted a part of the salary paid which demonstrates that the Department does not dispute the fact that the wives of the partners in fact were rendering services to the firm. The dispute is only with regard to the quantum of salary paid. According to the Assessing Officer, the salary paid by the assessee to the concerned individuals is high and excessive and accordingly he has estimated the reasonable salary at ` 8 lakh each of them.
7 M/s. Blossom Developers 8. However, a reading of provisions of section 40A(2)(a) of the Act makes it clear that if the Assessing Officer is of the opinion that any expenditure claimed towards payment made to a related person 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 the benefit derived from such business, he can disallow so much of the expenditure which according to him is excessive or unreasonable. Thus, in terms of the aforesaid provisions, the Assessing Officer must come to a conclusion that the payment made by the assessee is excessive or unreasonable having regard to the fair market value of the goods, services, facilities or the legitimate needs of the benefit derived by the assessee from the business. The aforesaid conclusion has to be reached by the Assessing Officer not in vacuum but on the basis of cogent material brought on record. A reading of the assessment order makes it clear that the Assessing Officer has not brought any such material on record to back the estimation of salary expenditure at ` 8 lakh each to the concerned individuals. Of course, the learned Commissioner (Appeals) has enhanced the payment of salary to the concerned individuals, again on the basis of estimation, to ` 30 lakh each.
At the same time, as could be seen from the impugned order of the learned Commissioner (Appeals), in assessment year 2010–11, the
8 M/s. Blossom Developers assessee had paid salary of ` 12 lakh each to the concerned individuals and in assessment year 2011–12, the payment of salary to these persons were increased to ` 24,50,000 each. Thus, in the impugned assessment year, there is a quantum jump in salary payment to the concerned person as there is an increase of 2.6 times on the salary paid in assessment year 2011–12. The assessee has not brought any material to demonstrate what extra effort or service was rendered by the concerned individuals necessitating such huge increase in salary. Thus, the assessee on its part has also failed to demonstrate that the salary paid in the impugned assessment year is commensurate with the work performed or services rendered by the concerned individuals to the firm. Thus, when neither the claim of the assessee nor the conclusion of the Departmental Authorities regarding the payment of salary to the concerned individuals were supported by cogent material, the reasonableness of such payment has to be determined by applying certain yardsticks and on the basis of material available on record. As could be seen from the facts and material on record, in the assessment year 2010–11 the assessee has paid salary of ` 12 lakh each to the concerned persons which was increased to ` 24.50 lakh in assessment year 2011–12. Thus, there was an increase of two times between the salary paid in assessment year 2010–11 and 2011–12. Applying the same yardstick, in our considered opinion, the reasonable salary payment for the impugned assessment year can be fixed at ` 50
9 M/s. Blossom Developers lakh each, as such increase in salary payment is approximately twice the amount of salary paid in assessment year 2011–12. Thus, the assessee gets a further relief of ` 40 lakh. Thereby, the disallowance made under section 40A(2) of the Act is restricted to ` 30 lakh. The decisions relied upon are not of much help to the assessee as issue in dispute has to be decided purely on the basis of facts involved. Before parting, we must put it on record that our aforesaid decision is purely in the context of surrounding facts and circumstances of the impugned assessment year, hence, should not be considered to be laying down any precedent on the disputed issue. The grounds are partly allowed.
The next issue as raised in grounds no.3 and 4, relates to disallowance of payment under section 40A(2) of the Act in respect of payment made towards commission and brokerage.
Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the parties / persons to whom commission and brokerage of ` 37,05,000 was paid are related parties as per the provisions of section 40A(2)(b) of the Act called upon the assessee to justify such payment. In response, it was submitted by the assessee that brokerage was paid to these persons as they introduced customers and helped in selling the flats. It was also submitted that brokerage was paid at prevailing market rate and tax was also deducted at source while making such payment. As observed by the
10 M/s. Blossom Developers Assessing Officer, the assessee except filing vouchers of brokerage payment did not furnish any evidence to demonstrate the work done / services rendered by the concerned parties for justifying the payment made. Thus, ultimately the Assessing Officer disallowed the brokerage payment of ` 37,05,000. The assessee challenged the disallowance before the first appellate authority.
The learned Commissioner (Appeals) after considering the submissions of the assessee having found that similar payment made to the concerned persons in assessment year 2010–11 and 2011–12 were allowed in scrutiny assessments allowed commission payment to the extent of ` 20 lakh, thereby, restricting the disallowance to ` 17,05,000. While the Department has accepted the decision of the learned Commissioner (Appeals), the assessee has preferred appeal before us.
The learned Counsels appearing for the parties have reiterated the submissions made by them in respect of grounds no.2 and 3 herein above.
We have considered rival submissions and perused materials on record. As could be seen, the Assessing Officer has disallowed under section 40A(2)(a) of the Act the under mentioned commission payments.
11 M/s. Blossom Developers ` 9,55,000 1. Anagha D. Joshi 2. Willma D’Souza ` 9,50,000 ` 8,70,000 3. Melroy D’Souaz 4. Abhishekh Joshi ` 9,25,000 Total:– ` 37,05,000
The learned Commissioner (Appeals) has restricted the aforesaid disallowance to ` 17,05,000. On a perusal of material on record, it is seen that in the preceding years also, the assessee has paid brokerage / commission to the aforesaid persons which have been allowed by the Department. In fact, in the immediately preceding assessment year i.e., A.Y. 2011–12, an amount of ` 9,41,500 was paid to Anagha D. Joshi towards brokerage and commission. In the scrutiny assessment order passed under section 143(3) of the Act on 29th March 2014, the Assessing Officer has allowed the aforesaid payment. Similarly, in case of Wilma D’Souza in the immediately preceding year i.e., A.Y. 2011– 12, brokerage / commission of ` 9,41,500 was paid and it was accepted by the Assessing Officer in the scrutiny assessment order. In case of Abhishekh Joshi, the amount of brokerage and commission paid in the immediately preceding assessment year was ` 9,03,000. Thus, as could be seen from the aforesaid facts, brokerage / commission paid to Anagha D. Joshi, Wilma D’Souza and Abhishekh Joshi, in the impugned assessment year cannot be considered to be either unreasonable or excessive considering the brokerage /
12 M/s. Blossom Developers commission paid in the assessment year 2011–12 which were allowed by the Assessing Officer in the scrutiny assessment completed under section 143(3) of the Act. That being the case, brokerage / commission paid to Anagha D. Joshi, Wilma D’Souza and Abhishekh Joshi has to be allowed fully. Thus, we are left with the reasonableness of brokerage / commission payment of ` 8,70,000 to Melroy D’Souza. As could be seen from the computation of income of this person placed in paper book, in assessment year 2010–11 no commission was paid and In the assessment year 2011–12 for the first time brokerage and commission of ` 3,33,000 was paid to him. Whereas, in the impugned assessment year brokerage / commission of ` 8,70,000 has been paid to the said person. Thus, there is a huge increase in brokerage commission payment to Melroy D’Souza. The assessee has not brought on record any cogent evidence regarding the services rendered by the concerned person necessitating such increase in commission payment compared to the immediately preceding assessment year. Thus, the concerned person being a related party, the brokerage / commission payment comes within the ambit of section 40A(2)(a) of the Act. That being the case, the reasonableness of payment made by the assessee has to be considered keeping in view the surrounding facts and circumstances of the case. Taking into consideration the fact that in the immediately assessment year an amount of ` 3,33,000 was paid as commission to Melroy D’Souza, in our considered opinion,
13 M/s. Blossom Developers brokerage commission payment of ` 4 lakh would be reasonable in the impugned assessment year. Therefore, the disallowance under section 40A(2)(a) of the Act in respect of brokerage and commission payment is restricted to ` 4,70,000. Grounds raised are partly allowed.
Ground no.5, being general in nature is dismissed.
In the result, assessee’s appeal is partly allowed. Order pronounced in the open Court on 08.06.2018
Sd/- Sd/- RAJESH KUMAR SAKTIJIT DEY ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 08.06.2018
Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary
(Sr. Private Secretary) ITAT, Mumbai