LUBE OIL DISTRIBUTORS,MUMBAI vs. DCIT 20(2), MUMBAI

Order Under Section 254(1) of Income Tax Act PER PAWAN SINGH, JUDICIAL MEMBER: 1. This appeal under section 253 of the Income-tax Act (‘the Act’) is directed by assessee against the order of Ld. Commissioner of Income-tax (Appeals) [for short ‘the CIT(A)] –32, Mumbai dated 18.03.2015 for Assessment Year (AY) 2007-08. The assessee has raised only one effective ground of appeal “ that ld. CIT(A) erred in confirming the disallowance of Rs. 24,00,000/- out of salary of Rs. 35,80,000/- 40A (2)(b) of the Act. Rest of the grounds of appeal either argumentative or consequential in nature.

2. Brief facts of the case are that assessee is a partnership firm deriving its income from business of distribution of products of India Oil Corporation (IOC). The assessee filed return of income for relevant AY on 31.10.2007 declaring income of Rs.21,52,960/-. The assessment was completed under section 143(3) on 25.11.2009. The Assessing Officer (AO) while passing assessment order besides the other addition and disallowance, disallowed Rs. 35,80,400/- u/s 40A(2)(b) of the Act. The AO disallowed the amount holding that the salary paid to sons and daughter-in-laws of one of the partner has been paid other than the business consideration. On appeal before the ld. CIT(A), the disallowance was sustained vide order dated 29.12.2010. Aggrieved by the order of ld. CIT(A), the assessee approached the Tribunal in second appeal. The Tribunal vide order dated 22.06.2011 in restored back the issue to the file of ld. CIT(A) to consider the material and pass order afresh after giving opportunity to the assessee. The ld CIT(A) after giving opportunity to the assessee passed the order dated 18/03/2015 and sustained the disallowance to Rs. 35,80,000/-. Hence, further aggrieved by the order of ld CIT(A) the present appeal is filed before Tribunal.

19,50,000/-. Miss. Archna Adani was shown as relationship Manager, Miss. Manali Adani is Administrative Work in the office, Mr. Parag Adani is shown as Sales and Control at head office and Rajiv Adani is Sales Manager. The AO further noticed that all four persons were actually relative of Panna P. Adani, one of the partner having 98% share in the partnership. The AO asked the assessee to substantiate the claim of expenditure and to file the evidence in support of the claim. After considering the reply of the assessee, the AO concluded that assessee has not furnished any evidence of actual work done by these four persons and disallowed the same. On appeal before CIT(A) the disallowance was sustained by ld. CIT(A). On further appeal before the Tribunal, it was argued that the sales incentive paid to Rajiv Adani and Parag Adani was with regard to their performance in the increased sale by 100% comparative to earlier AY. It was further argued that salary of Parag Adani and Rajiv Adani, there was increased in their salary from Rs. 2,02,000/- to Rs. 6,00,000/- in AY 2006-07. The increase was due to their performance in sales. While considering the contention of assessee Tribunal restored this ground to the file of ld. CIT(A) to decide the matter afresh after giving proper opportunity of hearing to the assessee. The ld. CIT(A) in the remand proceeding after considering the submission, passed the following order: “5.4 I have carefully considered the facts and circumstances of the case. The appellant has furnished the work done by Mr Parag and Mr Rajiv Adani. However, I find it absurd that the salary of Mr Rajiv Adani was only Rs.96,000/- in AY 2005-06, Rs.3,00,000/- in AY 2006-07 and Rs. 1 9,50,000/- in the current year. Similarly, Mr Parag Adani's salary was Rs.2,02,000/- in AY 2005-06, Rs.6,00,000/- in AY 2006-07 and Rs.19,50,000/- in the current year. The appellant has stated that the reason for increase in salary is the increase in sales. However, I find that though the sales have grown by a huge margin, the gross profit as a % of sales has come down from 13% to 7%. Thus, it appears that the appellant firm has claimed excess payment to relatives merely to lower the taxable profit of the firm. 5.5. It is clear that Ms. Archana Adani is a relationship manager who handles public relations and her increase in salary to Rs.1.85 lakhs is only marginal as compared with the preceding year. Mrs. Manali Adani is an administrative manager whose salary was Rs.1.25) Lakhs which is comparable with market rates. Hence, no disallowance u/s 40(A)(2)(b) of the Act is warranted in the case of Ms. Archana Adani and Mrs. Manali Adani. As regards, payment to Mr. Rajiv Adani and Mr. Parag Adani, the appellant has proved the expertise 3 of the said persons which is evidenced from the correspondence with IOC. The appellant has also shown that the said salary was offered to tax in the hands of the recipients. 5.6. I am of the view that though the salary paid is in line with the expertise provided by Mr. Rajiv Adani and Mr. Parag Adani, the incentive paid is far beyond the market rates. It can also be ascertained that gross profit percentages have fallen drastically due to such huge incentives paid. In view of the totality of facts of the case, in the interest of justice, I restrict the disallowance u/s 40(A)(2)(b) of the Act to 100% of the incentive paid to Mr. Rajiv Adani and Mr. Parag Adani amounting to Rs.24,00,00/-. Hence, the appellant is entitled to relief of Rs. 11,80,000/- 6. In the result, the appeal is partly allowed.”