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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
ON THE 11TH DAY OF DECEMBER, 2018
BEFORE THE HON'BLE MR. JUSTICE RAVI MALIMATH
AND
THE HON'BLE MR. JUSTICE K. NATARAJAN
INCOME TAX APPEAL NO.244 OF 2010
BETWEEN:
COMMISSIONER OF INCOME TAX
MANGALURU.
ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-10(1),
BENGALURU.
... APPELLANTS
(BY SRI JEEVAN J. NEERALGI, ADVOCATE)
AND:
M/S. SWADESHI INTERNATIONALS
NO.731, INDUSTRIAL LAYOUT, HOSUR MAIN ROAD.
... RESPONDENT
(BY SRI A. SHANKAR, SENIOR COUNSEL, ALONG WITH SRI M. LAVA, ADVOCATE)
* * *
THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260A OF THE INCOME TAX ACT, 1961, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW AS STATED THEREIN AND TO ALLOW THE APPEAL BY SETTING ASIDE THE ORDER OF THE TRIBUNAL IN I.T.A. NO.703/BANG/2009 AND CROSS OBJECTION NO.47/BANG/2009 AND TO PASS CONSEQUENTIAL ORDERS, IN THE INTEREST OF JUSTICE AND EQUITY.
THIS INCOME TAX APPEAL COMING ON FOR HEARING THIS DAY, RAVI MALIMATH, J., DELIVERED THE FOLLOWING:
J U D G M E N T
The assessee is a Trust doing business of manufacture and export of garments. For the Assessment Year 2005-06, it filed a return of income disclosing the income of Rs.78,74,869/-. The return was processed under Section 143(1) of the Income Tax Act, 1961, (for short, ‘the Act’). The assessee’s case was selected for scrutiny and notice under Section 143(2), was issued. In response, the assessee appeared. The books of accounts were produced. It was noticed that the assessee has debited a sum Rs.1,69,78,000/- towards remuneration paid to the trustees, namely, Sri Sunit Gupta and
Smt. Simi Gupta. Unsigned true copies of the resolutions passed on 20-8-2004 authorising the said payment was furnished during the proceedings. The resolutions indicated that Sri Sunit Gupta is provided with a remuneration/compensation of Rs.1,01,86,800/- for the services rendered to the Trust in pursuance to Clause 6(s) of the indenture of Trust. Similarly, Smt. Simi Gupta is provided with remuneration of Rs.67,92,100/- for the very same purpose. In view of the fact that one of the trustees had not signed to the resolution to the extract given to the Officer, the resolution was not accepted as a valid resolution. That in the earlier years, no remuneration was provided. Suddenly, there is no reason as to why such a huge amount should be paid as remuneration. That both the trustees are husband and wife and therefore, they have apportioned the profits among themselves. The remuneration is exorbitant. The authorisation for such a payment is not in accordance with law. On considering the material, the Assessing Officer came to the conclusion
that a sum of Rs.12,00,000/- per annum to Sri Sunit Gupta and a sum of Rs.6,00,000/- per annum to Smt. Simi Gupta would be a reasonable remuneration. Therefore, the same was allowed to that extent.
Secondly, during the year, the Managing Trustee, Sri Sunit Gupta visited almost seven countries. The explanation offered was that the trips are for the purposes of soliciting business. The visit pass of Singapore shows that it is for social purpose. Therefore, the Assessing Officer concluded that it is not a business visa. Newzealand visa shows that it is a visitor’s visa and not a business visa. Visa for European country shows that it is ‘not for business’. Therefore, the Assessing Officer came to the conclusion that the said expenses cannot be considered towards business purpose. Hence, the expenditure was allowed to the extent of 50% of the sum debited to foreign travel. Questioning the same, an appeal was filed before the Commissioner of Income Tax
(Appeals). The appeal was partly allowed. The entire amount paid as remuneration to the Directors was allowed. So far as expenses incurred towards foreign travel is concerned, the same was disallowed. Aggrieved by the same, an appeal was filed by the Revenue and the assessee filed cross-objections before the Tribunal. The Tribunal dismissed the appeal filed by the Revenue and the cross-objection filed by the assessee was partly allowed by setting aside the disallowance, so far as foreign travel is concerned. Questioning the same, the Revenue has filed this appeal.
By the order dated 6-6-2011, the appeal was admitted to consider the following substantial question of law:
Whether the finding of the Income Tax Appellate Tribunal in upholding the view of Commissioner of Income Tax (Appeals) with regard to remuneration of Rs.1,68,78,000/-
paid to trustees even though the same is against to provision of Section 40A(2)(b) of the Income Tax Act?
Learned counsel for the appellant contends that yet another question of law arises for consideration, which reads as follows:
Whether, on the facts and in the circumstances of the case, the Tribunal was right in allowing foreign travel expenses when the assessee has not established that such expenditure was incurred exclusively in connection with business affairs of the assessee and as such ingredients of Section 37(1) of the Income Tax was not fulfilled by assessee to claim as such?
Hence, we have heard learned counsels on both the substantial questions of law.
On hearing learned counsels, we are of the view that the said question of law would also arise for consideration. Hence, the appeal is considered on both the substantial questions of law. So far as question of payment of remuneration is concerned, the Commissioner of Income Tax (Appeals) was of the view that the remuneration paid to the Directors was disclosed in the return of income. Consequently, Sri Sunit Gupta had paid tax of Rs.42,90,611/- and Smt. Simi Gupta had paid tax of Rs.27,50,960/-. The returns of income were accepted by the Commissioner of Income Tax (Appeals) and was acknowledged by the Assessing Officer in his remand report. That the reasonability of the expenses incurred by the appellants Trust must be tested considering the relevant yardsticks and there cannot be a subjective opinion of the Assessing Officer in this regard. The Trust has been created for the purpose of doing business. Trust has earned income and the remuneration is paid to the
trustees. The trustees have also paid taxes for the remuneration received by them. Therefore, it is not for the Assessing Officer to conclude what is an appropriate payment or remuneration to be paid to the trustees. The Hon’ble Supreme Court in the case of S.A. BUILDERS LTD. v. THE COMMISSIONER OF INCOME TAX (APPEALS), reported in (2007) 288 ITR 01 (SC) held that the reasonableness of the expenditure is to be judged from the point of view of the businessman and the Revenue cannot sit in the arm chair of the businessman to decide what is reasonable and what is not. Under these circumstances, we are of the view that there is no error committed by the Commissioner of Income Tax (Appeals) or by the Tribunal, which calls for any interference. Consequently, the findings recorded by the Tribunal in upholding the view of the Commissioner of Income Tax (Appeals) with regard to remuneration of Rs.1,68,78,000/- paid to the trustees is just and proper. Therefore, the first substantial question
of law is answered in favour of the assessee and against the Revenue.
So far as the second substantial question of law is concerned, the Assessing Officer disallowed the claim based on the type of visa, which the trustee had produced for consideration. The assessee had gone for specific business purposes to extend his business. He visited various countries for the purpose of doing business. It does not mean that under a tourist visa, no business can be transacted. There is no material to indicate that no business was done by the assessee in these trips. Therefore, the order of the Commissioner of Income Tax (Appeals) as well the Tribunal is just and proper. Under the circumstances, we hold that in the facts and circumstances of the case, the Tribunal was right in allowing the foreign travel expenses incurred by the trustee and thereby, the ingredients under Section 37(1) of the Act was fulfilled. The second substantial question of
law is answered in favour of the assessee and against the Revenue.
Accordingly, the appeal is disposed off.
SD/-
SD/- JUDGE
JUDGE
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