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Income Tax Appellate Tribunal, MUMBAI BENCH “D” MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2011-12. The appeal is directed against the order of the Commissioner (Appeals) – 21, Mumbai and arises out of order u/s 143(3) of the Income Tax Act, 1961 (the ‘Act’).
The grounds of appeal filed by the assessee read as under:
i. On the facts and under the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the AO of estimating profit @20% of the receipts and making adhoc disallowance of Rs. 19,00,538/- [Rs. 25,21,458/- being 20% of Rs. 1,26,07,291/- less Rs. 6,20,920/- (already offered for tax)] ii. On the facts and under the circumstances of the case and in law, the learned CIT(A) erred in confirming the disallowance made by the AO by invoking Sec 40A(2)(b) and without rejecting its books of accounts. iii. On the facts and under the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the AO by ignoring the fact that the amount paid to Sushma Sharma Consulting Private Limited is taxed at maximum rate and hence there is no revenue loss.
Briefly stated, the facts are that the assessee-company i.e. M/s. Resonate Consulting Private Ltd. (RCPL) filed its return of income for the A.Y. 2011-12 on 27.09.2011 declaring total income of Rs. 6,20,920/-. The assessee deals with human resource and management consultancy. During the year, it claimed professional fees amounting to Rs. 1,07,28,001/- as against professional fees received of Rs. 1,26,07,291/-. Having examined the details, the Assessing Officer (AO) observed that the major payments were shown u/s 40A(2)(b) of the Act. The details are as under:
Name of the Director Name of payment Relation Amount (Rs.) Sushma Sharma Rent Director 1,80,000 Vikram Bhatt Professional fees Director 3102011.02 Sushma Sharma Professional fees Sister concern 5812412.98 Consultant Pvt. Ltd. Rajendra Sharma Remuneration Director 180000 Further, the percentage of share holdings of the Directors is shown as under:
Sl No. Name of the Director No of shares held 1 Sushma Sharma 7,600 (76%) 2 Deepa Laxman 600 (6%) 3 Rajendra C Sharma 600 (6%) 4 Vikram Kirit Bhatt 1200 (12%)
As the payments made to M/s. Sushma Sharma Consultant Pvt. Ltd. (SSCPL) in which Mrs.Sushma Sharma is a Director and substantial stake holder, being on higher side, the assessee was asked to justify the reasonableness of payments made u/s 40A(2)(b) of the Act. The AO asked the assessee to furnish a detailed note with proof about services availed from SSCPL. The AR of the assessee stated before the AO that Mrs. Sharma was providing services relating to human resource management and for betterment of corporate units. However, the AR could not provide the note on services availed from SSCPL. The AO observed that the assessee failed to bring on record the justification for such payments with any cogent reasoning. During the year the assessee had shown NP @ 4.97% whereas one assessee M/s. Renoir Consultancy India Ltd. assessed in the charge of the AO was showing profit of around 20%. The AO estimated the profit of the assessee @ 20% and brought the differential amount of Rs. 19,00,538/- (Rs. 25,21,458/- minus Rs. 6,20,920/-) to tax.
Aggrieved by the order of the AO, the assessee filed an appeal before the learned CIT(A). We find that the learned CIT(A) has held as under:
“A perusal of details of professional fees paid by the appellant company shows that it is only Sushma Sharma who has routed the payment through SSCPL whereas other professional have received payment directly including Vikram Bhatt, the person who has received the second largest amount of professional fees. It is also noted that Sushma Sharma, through this method of creating layer of another company SSCPL has whittled down the payments received from appellant company. Further, as the main promoter and director of the appellant company, she has charged a high amount to the appellant company, thereby reducing is profits to only 5%. As against Rs. 52.58 lakhs billed by SSCPL, the actual fees reflected as salary by Sushma Sharma is only Rs. 18 lakhs, offered in her return of income. The Assessing Officer has adopted a comparison of net profit offered by comparable consultancy company to make disallowance of expense/addition to income of Rs.
19,00,538/-. In effect this is a disallowance u/s 40A(2)(b). In view of the Assessing Officer that tax has been sought to be reduced by arranging the payments by Sushma Sharma, the key person and promoter in this case, and absence of justification for such high payments to SSCPL, the disallowance u/s 40A(2)(b) is affirmed at Rs. 19,00,538/-.
Before us, the learned counsel of the assessee filed a paper book containing (i) Sample of invoices of professional income received during the year along with corresponding professional expenses for Resonate (ii) Expense chart with ratios for Resonate (iii) Ledger of professional fees paid to SSCPL by Resonate (iv) Expense chart with ratios of SSCPL along with justification. Reliance was placed by him on the decision in the case of CIT vs. Indo Saudi Services (Travel) P Ltd. (2009) 310 306 (Bom)
Per contra the learned DR relied on the order of the learned CIT(A).
We have heard the rival submissions and perused the relevant material on record. In the case of Indo Saudi Services (Travel) P Ltd. (supra), the issue was whether the incentive commission paid to sister concern was excessive and unreasonable. The Tribunal held that the revenue had allowed similar rate in earlier years. The sister concern was paying tax at a higher rate. The Hon'ble High Court held that it was not a case of evasion of tax and deduction was to be allowed. Here the issue is different. The AO during the course of assessment proceeding asked the assessee to justify the reasonableness of payment u/s 40A(2)(b) of the Act. The assessee was asked by him to furnish a detailed note with proof about services availed from SSCPL. The AR of the assessee could not provide a note to the AO on services availed from SSCPL. Then the AO applied the profit @ 20% which we find unreasonable. The same has been confirmed by the learned CIT(A) without proper appreciation of facts. The learned counsel of the assessee has filed before us sample of invoices of professional income received during the year along with corresponding professional expenses which do not give the ramification of the transactions. The assessee should file complete invoices of professional income received during the year along with corresponding professional expenses .In view of the above, the order of the learned CIT(A) on the above issue is set aside and the case is restored the file of the AO to make a fresh assessment as per the provisions of the Act after giving reasonable opportunity of being heard to the assessee. The assessee is directed to file the full details before the AO.
In the result, the appeal is allowed for statistical purposes.
Order pronounced in the open court on 19/04/2017