CERA-CHEM PVT. LTD.,CHENNAI vs. ACIT, CHENNAI

आदेश / O R D E R

Per A. Mohan Alankamony, AM:-

(ii) The Ld.CIT(A) has erred in upholding the order of the Ld.AO with respect to the disallowance of Rs.3,34,00,000/- being the compensation/reward paid to Shri R. Ravikumar, the Director of the Company on his retirement towards his meritorious services.

At the outset, we find that the return was initially processed U/s.143(1) of the Act and thereafter within 4 years from the end of the relevant assessment year, the assessment was reopened because the Ld.AO observed certain payments made by the assessee to be excessive. In this situation, we are of the considered view that the reopening of the assessment by the Ld.AO does not suffer from any infirmities because he had a valid ground for reopening and the case of the assessee had not undergone scrutiny on any earlier occasion because earlier the return was only processed U/s.143(1) of the Act. Therefore we hereby uphold the action of the Ld.AO on reopening. Thus this ground raised by the assessee is devoid of merits.

Director. (iii) Shri Ravikumar was the main man behind the company’s product in the field of building chemicals and played an important role in building up the brand name “CERA

CHEM”. (iv) Shri Ravikumar had worked in the company tirelessly with great amount of integrity and dedication.

(v) With his technical input and managerial skills, he has brought the company to its present stature. (vi) Shri Ravikumar has been drawing salary of only Rs.2.5 lakhs per month until retirement.

Because of the above relationship between the assessee company and Shri Ravikumar, the Ld.AO opined that the huge unreasonable payment of Rs.3,34,00,000/- to Shri Ravikuma who is not related to any of the existing Directors of the company, will definitely be on account of an unwritten agreement towards non- compete fee or against starting rival business. In this circumstances, the Ld.AO further opined that the benefit of the expenditure incurred by the assessee is of enduring nature, therefore it would amount to capital expenditure and not allowable as deduction as revenue expenditure. The Ld.AO also relied on certain case laws cited in his order while arriving at his decision.

5.1 On appeal, the Ld.CIT(A) taking cue from the decision of the Hon’ble Kerala High Court in the case Mrs. Oberan Trading Corporation vs. ITO reported in 360 ITR 19 held that the payment made to the Director towards settlement did not result in a tangible or intangible asset which is eligible for depreciation. He further observed that “the appellant company is in the business of manufacture of construction chemicals and compensating retiring partners in pursuance of “settlement of directors” arrived at by way of agreement resolved by the Board cannot said to be for the purposes of the business of the appellant. The claim does not satisfy the test of being laid out or expended wholly and exclusively for the purpose of business of the appellant. All payments do not qualify to be allowed as expenditure and to that extent cannot be a charge on the profit of the business. To that extent a payment as this being ex-gratia in nature does not qualify to be allowed. Reappointment of the right of directs in the assets of the company does not affect the business of the company and the profit and loss of the company. If at all it only limits the right of each of the continuing directors over the assets of the company.” In view of the above the Ld.CIT(A) upheld the order of the Ld.AO.

5.2 Before us the Ld.AR argued by reiterating his submission made before the Ld.CIT(A). The same is extracted herein below from the order of the Ld.CIT(A) for reference:- a) “The payments made to the retiring director employees who are working more than fifteen years, at the time of retirement are retirement benefit for their long and meritorious services. b) This payment was not made as a compensation for relinquishing any rights or interest in the assets and liabilities of the company. Because of this payment, there was neither relinquishment of any rights, titles, interest in the shareholding or stakes in favour of anybody nor any transfer of rights or ownership of shares in favour of any shareholders were taken place. c) Because of the above said payment of retirement benefit, there was no bar was imposed on the part of the retired director employees either to start a similar business of the appellant company after retirement or to be a competitor to the appellant company in future. d) The retirement benefits were fixed based on the retired employee’s period of employment, integrity, devotion, honesty, managerial skills, marketing ability and dedication. e) Quantum of retirement benefits are neither excessive nor unreasonable, if the factors such as market value of the fixed assets of the company, turnover and returned income of the past years, goodwill, privileges gained in the market and above all the meritorious, dedicated services rendered by the retired director employees while in employment are considered judiciously. f) TDS has been deducted on the above referred retirement benefits u/s.192 of Income Tax Act. The recipient retired employee directors also returned this “retirement benefits” received by them under the head “salary” and if it was in the nature of “non- compete fee”. Then they could have treated it as “business income” u/s.28(va) of Income Tax Act and also might have claimed deduction of expenditure incurred thereon u/s.28 to 44 of Income Tax Act. Instead they have claimed the same under the head ‘salary’ as salary income. g) Further, the appellant contested that it has established before the AO that the case laws relied upon by the Assessing Officer are with respect to payment made to retiring partner by the firm and not applicable for the retirement benefits made to retired employee directs by company. Further, the appellant submitted that the case law M/s. Sharp Business Systems (supra) relied upon by the AO are entirely different and distinguishable from the facts of the case. h) It is further submitted that if the retired director employees of the appellant company if wills, can commence any similar business of the appellant company and also compete the appellant company. The appellant company have no legal rights to bar them to do so. Hence the payment made to the retired director employees are retirement benefit only and non-compete fee.”

The Ld.DR on the other hand argued in support of the orders of the Ld.Revenue Authorities and pleaded for confirming the same.

5.3 We have heard the rival submissions and carefully perused the materials on record. From the facts of the case, it is apparent that the payment made to the director as final settlement is due to the appreciation of his hard work in the company during the past which resulted in the advancement of the company. Due to the effort of the Director, the company had earned enormous revenue and goodwill in the market. Further the Director of the company who is in receipt of the settlement has disclosed the amount received from the company as his income and paid tax accordingly. It is also pertinent to mention that there is no contractual obligation on the part of the Director for non-competing or involve in any rival competition. Thus the payment made to the Director has not resulted in any enduring benefit to the assessee company. Further as pointed out by the Ld.AR, there was neither relinquishment of any rights, titles, interest in the shareholdings or stakes in favour of anyone nor transfer of any rights or ownership of shares in favour of any shareholders. In this situation, it can be only construed that the payment made to the Director is retirement benefit bestowed on him based on his performance in the company. Though the Ld.AO has stated in his order that the payment made to the Director is excessive, he has not reasoned as to how the payment is excessive. Further it is an accepted proposition that the Ld.AO cannot sit on judgment with respect to the administrative and business decisions of the assessee. The assessee has computed the retirement benefits of the Director based on his skills, integrity, marketing ability etc., and the revenue earned by the company. It is the prerogative of the assessee company to determine as to how much it should pay to compensate its directors or employees. The assessee has also deducted tax at source towards the payment made to the Director. Considering all these facts, we are of the considered view that the expense incurred by the assessee company is revenue in nature and therefore allowable as deduction under the provisions of the Act. Hence, we hereby direct the Ld.AO to delete the addition of Rs.3,34,00,000/- made in the hands of the assessee towards settlement amount paid to its Director.

Order pronounced on the 27th September, 2017 at Chennai.