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Income Tax Appellate Tribunal, ‘A’ (SMC
Before: SHRI ABRAHAM P.GEORGE
अपीलाथ$ क' ओर से/ Appellant by : Mr.R.Sivaraman, Adv. : %&यथ$ क' ओर से /Respondent by Mr.B.Sagadevan, JCIT सुनवाई क' तार"ख/Date of Hearing : 02.07.2018 घोषणा क' तार"ख /Date of Pronouncement : 04.07.2018 आदेश / O R D E R PER ABRAHAM P.GEORGE, ACCOUNTANT MEMBER:
In this appeal filed by the assessee, which is directed against an order dated 27.09.2017 of Commissioner of Income Tax(Appeals)-1, Chennai, it is aggrieved on a disallowance made u/s.40A(2) of the Act.
Facts apropos are that assessee a domestic company engaged in testing and certification of building material, had filed its return for the impugned Assessment Year declaring an income of Rs.2,51,393/-. During :- 2 -: the course of assessment proceedings, the AO found that the assessee had paid salary to the following related parties:
S.No. Name of the person Relationship Amount 1 Mrs.G.Saroja W/o Shri A.V.Balachandra, Director 4,20,000 2 Mrs.Renuka Sreenath W/o Shri H.G.Sreenath, Director 1,20,000 3 Mrs.Yasmin Hanif W/o Shri Mohammed Hanif, Director 6,42,000 4 Mrs.L.Parveen Niyaz W/o Shri R.Latheef, Director 3,60,000 Total 15,42,000
AO required the assessee to explain the nature of services rendered by the above persons. It was explained by the assessee that these persons were working since 01.05.2007 and discharging functions associated with their respective designations. Details given by the assessee read as under:
S. Name of the Amount W/o Designation No. staff paid 1 Mrs.G.Saroja Mr.A.V.Balachandra Manager (Finance) 4,20,000 2 Mrs.Renuka Mr.H.G.Sreenath Manager (Admn) 1,20,000 Sreenath 3 Mrs.Yasmin Hanif Mr.Mohammed Hanif Marketing 6,42,000 Manager 4 Mrs.L.Parveen Mr.R.Latheef Accounts Manager 3,60,000 Niyaz
AO issued summons u/s.131 of the Act to the above persons. In response to these summons, all the persons except Smt. G.Saroja appeared, and statements were recorded from them. Ld.AO made an analysis of the replies given by them to the various questions posed by him and came to a conclusion that they were not doing any significant work for the assessee. Ld.AO was of the opinion that the assessee had paid salary which was excessive or unreasonable having regard to the fair market value of the services rendered by these persons. Though the :- 3 -: assessee stated that these persons worked beyond their assigned roles and responsibilities and was instrumental in developing the company, the AO was not impressed. He held that the payments made to these persons as salary called for disallowance u/s.40A(2)(b) of the Act. Aggregate disallowance made came to Rs.15,42,000/-.
Aggrieved, assessee moved in appeal before the Ld.CIT(A). Relying on the judgment of the Hon’ble Apex Court in the case of Upper India Publishing House (P) vs. Commissioner Of Income Tax, reported in 117 ITR 569, it was argued by the assessee that the expenditure whether excessive or unreasonable was a question of fact and considering the nature of services rendered by the four persons, salaries paid were neither excessive nor unreasonable. However, the Ld.CIT(A) was not impressed by the above argument. According to him, average salary paid by the assessee for its all other employees came only to Rs.1,06,000/- per annum. He held that the three persons who had appeared before the Ld.AO, even if they had rendered any services to the assessee company, ought not have been paid more than Rs.1,06,000/-. However, Smt.
G.Saroja, as per the Ld.CIT(A) had not appeared before the AO and hence the claim of any salary to her could not be accepted. Thus, he held the justifiable salary to be only Rs.3,18,000/-. Balance of the disallowance was confirmed. :- 4 -:
Now, before us, the Ld.AR strongly assailing the orders of the below authorities submitted that, three of the persons namely Smt. Yasmin Hanif, Smt. Renuka Sreenath, Smt. L.Parveen Niyaz had appeared before the AO and confirmed that they were rendering services to the assessee company. Smt. G.Saroja, as per the Ld.AR, though, she had not appeared before the AO, she had done important work in her role as Manager (Finance) and disallowance of her salary was not warranted. Relying on the Sec.40A(2) of the Act, Ld.AR submitted that disallowance under the said Section could be made only where expenditure was found to be excessive or unreasonable when compared to the Fair Market Value of the services rendered. As per the Ld.AR, no comparable cases were brought in by the AO before making the disallowance. Thus, according to him, a disallowance u/s.40A(2) of the Act was not warranted.
Per contra, the Ld.DR submitted that one of the four persons, namely Smt. G.Saroja did not appear on summons and no evidence whatsoever was produced in support of the contention that she was doing any work as Manager (Finance). Further, as per the Ld.AR, other three persons in their statements given to the AO had clearly mentioned that they were either not attending the office regularly or was not authorized to sign any documents maintained by the assessee company nor aware about the type of accounting software used. Thus, according to him, none of these persons were rendering any service and disallowance u/s.40A(2) of the Act was rightly done by the AO. :- 5 -:
We have heard the rival contentions and perused the material placed on record. What was stated by Smt. Renuka Sreenath when she was summoned by the AO is reproduced here under:
“Q.No. 7: What is your role & responsibilities in the company?
Ans: I am looking after administration work. I am assisting my husband Mr.Sreenath, who is the Technical Director Q.No.17: Tell me about your day to day work?
Ans: I check the attendance of the employees. I over all check the working conditions of the machineries. If any repair work to be carried out I will inform the concerned person.
Q.No.22: Is there any attendance register for you? How will you mark your attendance?
Ans: There is no attendance register for me. Other staff are signing.
Q.No.23: On 29.12.2015, Mr.Saravanan ITI of this office visited your office you were not there. Please explain?
Ans: I did not go to office on that day as my husband had to go to Bangalore. Q.No.24: When did you attend office last? Ans: Only when required I go to Office.”
What was stated by Smt. Yasmin Hanif when she was summoned by the AO is reproduced here under:
“Q.No. 7: Before joining company did you work anywhere?
Ans: No Q.No.11: What is your Role & responsibility in the company?
Ans: I do the marketing work for testing. I invite customers to our office also I go out for meeting the clients and talk about our services done.
Q.No.19: Tell me about your day to day activities?
Ans: I am assisting my husband (Hanif) I check the mails and give replies :- 6 -:
Q.No.20: Who is your immediate superior? Ans; My husband Q.No.21: How many people are working under you? Ans: No one.
Q.No.26: Are you competent & authorized to sign any document or communication on behalf of the company?
Ans: No Q.No.27: If you immediate superior is not there, will you take decision independently?
Ans: No there are other 3 partners who will do the needful.
Q.No.28: You have joined as a Marketing Executive and in form 16 your designation is mentioned as Manager (Technical)? When did you get your promotion?
Ans: I don’t remember.
Q,No.33: Have you flied your return of income for A.Y.2013-14?
Ans: I don’t know. My husband takes care What was stated by Smt. L.Parveen Niyaz when she was summoned by the AO is reproduced here under:
“Q.No.10: What is your role & responsibilities in the Company?
Ans: I am assisting my Husband. Whatever cash received during the day I deposit the cash in the bank. I will fill up the challan & send it through office boy for depositing in the bank Q.No.11: Are you in charge of the accounts of the company?
Ans; No. One Senior Accountant Mrs. Viayalakshmi is in charge of accounts. Q.No.12: What is the software used for accounting? Ans: I don’t know. Only accountant will be knowing. Q.No.13: Who is your immediate superior? Ans: My husband R.Latheef Q.No.14: did you file your return of income? Ans: I don’t know. Only my husband knows. Q.No.17: Please tell me about your day to day affairs? :- 7 -:
Ans: I check the mails, note down telephone calls, and inform my husband Q.No. 18: do you perform any work relating to the accounts of your company?
Ans: No. Q.No.21: Are you competent or authorized to sign any document or communication on behalf of the company?
Ans: no. Q.No.23: on 29.12.2015 Mr.Saravanan ITI of this office visited your office. You were not there. Please explain.
Ans: To take care of my children I was at home. My husband came to my house and brought me to receive the summon.
Q.No.26: do you have any attendance register to sign?
Ans: No, there is no such attendance register for me. Attendance register is only for other employees.
Smt. Renuka Sreenath, clearly mentioned that she attended the office only when it was required and there was no attendance Register, wherein, she was signing. Smt. Yasmin Hanif said that nobody worked under her. Smt. L.Parveen Niyaz, stated that she was only depositing cash in the bank, filling up the challan and was not aware of the type of software maintained by the assessee company for its accounting purposes. Smt. Renuka Sreenath was assigned as Manager(Admn.), Smt.
Yasmin Hanif as Manager (Marketing) and Smt. L.Parveen Niyaz as Manager(Accounts), which are all apparently very senior positions in management. In my opinion there is much strength in the argument of the Ld.DR, that these persons were not having necessary qualification and could have never rendered services commensurate with the posts held by them. As for Smt.G.Saroja, she did not appear before the AO. Ld.CIT(A) :- 8 -: had analyzed the salary paid by the assessee to its other employees as under:
Name of Experience S.No. Designation Qualification Salary paid employee in years 1 Anbazhagan Sr.Lab SSLC 25 1,70,300.00 Technician 2 Habibullah Office Asst. SSLC 5 1,56,000.00 3 Krithika A/c. Executive B.Com 5 1,48,529.00 Asst. 4 Mohammed Technical BE 4 34,016.00 Siddique Officer 5 Priya Malini A/c. Receptionist B.Sc 9 1,42,717.00 6 Rafiq Jr.Chemist B.Sc. 8 1,56,000.00 7 Raja A/c. Lab SSLC 4 1,13,656.00 Technician 8 Rajesh A/c. Lab Plus Two 2 62,368.00 Technician 9 Ramesh Raja Technical BE 7 1,52,698.00 Officer 10 Ramkumar A/c. Lab SSLC 6 88,100.00 Technician 11 Sankar.S Technical BE 6 34,016.00 Officer 5th 12 Santhi.D Servant Maid 0 17,950.00 (Servant Maid) 13 Santosh Lab SSLC 4 77,434.00 Kumar.V Technician 14 Selvaraj A/c. Lab SSLC 4 8,390.00 Technician 15 Srinivasan A.M. Chemist B.Sc. 7 1,42,985.00 16 Thangakumar Technical BE 6 1,62,347.00 A/c. Officer 17 Venkatesh A/c. Lab SSLC 8 1,84,500.00 Technician 18 Vigneshwaran Lab Plus Two 1 10,268.00 Technician 19 Vijayalakshmi Accountant B.Sc. 15 1,90,704.00 A/c. 20 Vinoth Kumar Lab SSLC 2 81,906.00 Technician Total-B 21,34,884.00 Ld.CIT(A) had averaged the salary of the above persons and came to the figure of Rs.1,06,000/-. He considered it to be the fair salary that could be allowed to the three ladies who were wives of the Directors of the assessee and who had appeared before the Ld.AO. A look at the table :- 9 -: above, clearly indicate that many of them were more or equally qualified than the four persons who were wives of the Directors of the assessee company. No doubt, the Ld.AR did submit that the AO had not brought out any comparable case to prove that the payments were excessive.
However, in my opinion, the above table extracted by Ld.CIT(A) give comparable cases which goes to show that the salary paid by the assessee to the four persons were excessive. Ld.CIT(A) was fair in allowing Rs.1,06,000/- as salary for the three persons who had appeared before the AO. Nevertheless, in my opinion Smt. G.Saroja ought not have been denied this benefit, just for a reason that she did not appear before the AO. Especially so since, the three persons who appeared before the Ld.AO, had not given any information enlightening enough to show that they were doing any work commensurate with their assigned positions. I am of the opinion that the salary of Rs.4,24,000/- for all the four persons would have been fair value of the services rendered by them. Ld.AO is directed to allow salary of Rs.4,24,000/- to the four persons. Balance disallowance is sustained u/s.40A(2) of the Act.
In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the Open Court on July 04, 2018, at Chennai. (अ"ाहम पी. जॉज") (ABRAHAM P.GEORGE) लेखा सद"य/ACCOUNTANT MEMBER :- 10 -: