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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
These cross appeals are arising out of the common order of Commissioner of Income Tax (Appeals)-22, Mumbai, [in short CIT(A)] in appeal No. CIT(A)-22/DCIT-10(2)/IT-340/2012-13, dated 22-09-2014. The Assessments were framed by the Deputy Commissioner of Income Tax, Circle-10(2), Mumbai (in short DCIT or AO) for the assessment year 2010- &. 7307/Mum/2014 SECO Warwick Allied Pvt. Ltd. (AY: 10-11) 11 vide order dated 22-02-2013 under section 143(3) of the Income Tax Act, 1961(hereinafter ‘the Act’).
The only issue in this appeal of assessee in is against order of CIT(A) confirming above disallowances of managerial remuneration of ₹ 7,32,880/- out of total managerial remuneration of ₹ 25,32,880 paid by the assessee company to Kailash V. Nasta. For this assessee has raised following ground No.1: -
“1. The learned Commissioner of Income Tax (Appeals) has erred in confirming the addition of ₹ 7,32,880/- made by the learned assessing officer, being disallowance of part amount of Managerial Remuneration of ₹ 7,32,880/- out of Managerial Remuneration of ₹ 25,32,880/- paid by the appellant company to Mr. Kailash V. Nasta by not appreciating the fact that the expenditure on account of such total remuneration of ₹25,32,880/- has been incurred wholly, necessarily & exclusively for the purpose of business of the appellant company.”
We have heard the learned Departmental Representative and gone through the facts and circumstances of the case. We find that the AO has made this addition with reference to remuneration paid to Shri Kailash V. Nasta in excess of limits sanction by Central Government. According to AO, the sanctioned limit as per Central Government is ₹ 18 lacs for the year under consideration and balance sum of ₹ 7,32,880/- is excess of sanctioned limit and hence, he disallowed the same relying on the decision of Hon’ble Madras High Court in the case of CIT vs. India Cement (2000) 241 ITR 62 (Mad.). Aggrieved, assessee preferred the appeal before CIT(A), who also confirmed the action of the AO by relying &. 7307/Mum/2014 SECO Warwick Allied Pvt. Ltd. (AY: 10-11) on the decision of Hon’ble Bombay High Court in the case of Ramben A. Thanawala V. Jyoti Ltd. (1957) 27 Comp. Cas. 105, 107; AIR 1958 Bom. 214 and also Hon’ble Madras High Court in the case of India Cement (supra). Aggrieved, assessee came in second appeal before Tribunal.
We find from the facts of the case that the AO while making the disallowance observed that the assessee has paid the amount of Rs.7,32,880/- in excess of the amount sanctioned by the Central Government under the Companies Act and therefore the same is not allowable. The assessee strongly objected to the above and stated the facts that the efforts put forth by Mr. Kailash Nasta in securing some important orders during the year, the assessee had decided to pay him an incentive at the rate of 2% of Net Profit. The decision to pay the incentive was taken by the Board in its resolution dared 15.01.2009. A copy of sanction Letter dated 11.11.2010 issued by the Central Government and the copy of Board Resolution dated 25.01.2009 are enclosed in assessee paper book. It was claimed by the assessee that the incentive of Rs.7,32,880/- has been paid in the normal course of business activity and therefore the same as allowable under section 37(1) of the Act.
We find from the records of the case that the 14 AO while passing the Assessment Order relied on the judgment of Hon'ble Madras High Court in the case of CIT Vs India Cement (2000) 241 ITR 62 (Mad) wherein the Hon’ble Madras High Court held that the payment made in contraventions of provisions of section 349 of the Companies Act, 1956 is not allowable under section 37(1) of the Act. We find that the assessee before CIT(A) tried to distinguished the above decision of Hon'ble Madras High Court relied on by the from the facts of its case. The argued that in the case before the Hon’ble Madras High Court, the company has paid to the 'managing agents the remuneration in excess of the provisions of &. 7307/Mum/2014 SECO Warwick Allied Pvt. Ltd. (AY: 10-11) section 349 of the Companies Act. As per the provisions of section 349 of the Companies Act the remuneration payable to managing agents of the public limited company is certain percentage of the net profits. In the case before the Hon’ble Madras High Court the company has paid the interest on the borrowings which has been claimed as deduction under section 37 of the Act. However, while calculating the remuneration payable to the managing agent, the interest paid on borrowings for acquisition of machinery had not been deducted while calculating the net profits, and as a consequence, the amount paid to the managing agent as remuneration was much in excess of what would have been payable had the net profits been calculated strictly in the provided in section 349 of the Companies Act, 1956. Whereas, in the case before us, the assessee claimed that it has paid remuneration to Mr.Kailash Nasta for securing some important agreements for the company. The said contract has resulted in profit of the assessee. The payment was also approved by the board resolution passed on 15th January 2009 and the remuneration paid does not violate any provisions of companies Act, 1956. It was further claimed before CIT(A) that Central Government has granted approval for payment of remuneration to Mr. Kailush Nasta under the provisions of section 334(1B) of the Companies Act, 1956. The approval granted by the Central Government is after considering the special resolution dated 15.03.2009. We gone through the case records and noted that CIT(A) has not considered this aspect while adjudicating the issue. Hence, for the purpose of verification of actual claim approved by Central Government, we restore this issue back to the file of CIT(A).
Coming to the only issue in this appeal of Revenue is against the order of CIT(A) restricting the profit at 25% of the total bogus purchases. For this Revenue has raised following ground: -
&. 7307/Mum/2014 SECO Warwick Allied Pvt. Ltd. (AY: 10-11)
1. On the facts and the circumstances of the case and in law, the CIT(A) had erred in partly holding the addition made by the AO by stating that only the profit element embedded in the bogus purchases is to be taxed instead of whole transaction.”
At the outset, the learned Sr. DR drew our attention to the bogus purchases made by assessee from the following three parties: -
M/s Mihir Sales Pvt. Ltd. ₹ 20,57,194/- 2. M/s Meridian Sales Agency P. ltd. ₹16,54,063/- 3. M/s Smartlink Traders P. Ltd. ₹ 19,13,358/- Total ₹ 56,24,615/- 8. The AO received information from investigation wing of the Income Tax Department Mumbai, who in turn received information from Sales Tax Department that the assessee has obtained bogus purchases bills from these parties, who are issuing hawala bills/ bogus bills. According to AO, the assessee is one of the beneficiaries of these bogus bills. According to AO, this above stated parties found by the Sales Tax Department of Mumbai indulging in issuing bogus bills. According to AO, assessee is one of the beneficiary of these bogus bills and accordingly, he added the entire amount of bogus purchases from these three parties at Rs. 56,24,615/-. Aggrieved, assessee preferred the appeal before CIT(A), who after considering the submissions of the assessee and other details and also considering the decisions of Hon’ble Gujarat High Court in the case of CIT vs. Smith P Seth 356 ITR 803 restricted the disallowance by estimating the profit rate at the rate of 25% by observing in para 3.11 as under: -
3.11 The facts in the present case showing. that the appellant was not in a position to prove the &. 7307/Mum/2014 SECO Warwick Allied Pvt. Ltd. (AY: 10-11) existence of the suppliers. The suppliers were found to be engaged in providing bogus bills without actual delivery of goods. Moreover, these suppliers are not regular parties and they were found to have been supplied only during the year and there were no supply either in the earlier year or in the subsequent year from such parties. I feel this circumstantial evidence itself prove the bogus nature of the transaction. On careful analysis of the finding of Hon'ble 1-11gb Court of Gujarat in the above mentioned cases, I am of the firm view that without purchase of materials it was not possible for the appellant to manufacture and sell furnaces. As mentioned above the AO had never disputed or examined the aspect of sates. Hence I am of the firm belief that the appellant had made cash purchases from other parties which were not recorded in the books. The appellant took only bills from these 3 parties as accommodation to explain the purchases. Therefore, the entire purchase from these 3 parties cannot be added as bogus and what needs to be taxed is the profit element embedded in such transaction. Estimation of 25% has been upheld by the Hon’ble Gujarat High Court depending upon the nature of the business. As held in the case of Simit P. Sheth (supra)no uniform yardsticks could be applied to estimate the rate of profit and it varies with the nature of business. Taking all the facts into consideration and the findings of the Hon’ble Courts on this issue, I am of the view that estimation of 25% of profit would meet the ends of justice. Therefore, I direct the AO to estimate profit of 25% on the total alleged bogus purchase which works out &. 7307/Mum/2014 SECO Warwick Allied Pvt. Ltd. (AY: 10-11) to ₹ 1,09,950/- (25% of ₹ 4,39,803/-). The appellant get the relief of the balance of ₹ 3,29,853/-. The Grounds raised are partly allowed.”
Aggrieved, Revenue is in second appeal before Tribunal.
We have considered the plea of learned DR and find that actual bogus purchases are at Rs. 56,24,615/- and this should be taken as correct figure in the order of CIT(A). However, we are not convinced with the arguments of learned DR to increase the profit rate or sustained full addition. We confirmed the order of CIT(A) except, the figures mentioned in the order of bogus purchases at ₹ 4,39,803/-, whereas, the actual bogus purchases are at ₹ 56,24,615/- which we have rectified. The appeal of Revenue is dismissed but subject to above directions.
In the result, the appeal of Assessee is set aside and that of the Revenue is dismissed.
Order pronounced in the open court on 27-10-2017.