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Income Tax Appellate Tribunal, MUMBAI BENCHES “SMC”, MUMBAI
Before: Shri Joginder Singh,
आदेश / O R D E R
The assessee is aggrieved by the impugned order dated 15/01/2015 of the Ld. First Appellate Authority, Mumbai. The first ground, raised by the assessee, pertains to confirming addition of Rs.3,10,00/-, made u/s 40A(2)(a) of the Income Tax Act, 1961 (hereinafter the Act), on account of remuneration paid to Shri Ramesh Nana Mhatre, the Managing Director of the company.
During hearing, the ld. counsel for the assessee, Shri Subodh Ratnaparkhi, contended that it is merely a tax neutral and in subsequent year the Assessing Officer himself accepted more income and place reliance upon the decision in the case of CIT vs Indo Saudi Services (Travel) Pvt. Ltd. 310 ITR 306(Bom.) and Hive Communication Pvt. Ltd. vs CIT 353 ITR 200 (Del.). This factual assertion was not controverted by the Shri S.K. Mishra, ld. DR. 2.1. I have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee, a private limited company, engaged in the business of manufacturing of engineering goods, declared total income of Rs.7,53,130/- on 13/10/2010 in its return. While framing the assessment, the ld. Assessing Officer disallowed, directors remuneration, u/s 40A(2)(a) of the Act paid to the managing director of the assessee company namely Shri Ramesh Nana Mhatre, to the extent of Rs.3,10,000/- by holding the same to be excessive. The reason of disallowance was based upon, identical disallowance, made for Assessment year 2008-09, which was upheld by the ld. First Appellate Authority. On a query from the Bench, it was explained by the ld. counsel for the assessee that such disallowance was confirmed due to non- attendance of the proceedings by the assessee. It was explained that the Managing Director Shri Mhatre is a person of international repute in the field of engineering and the entire business of the assessee company was based on the personal skill and technical competency of the Managing Director as various awards were presented to him, the details of which are available at page-2 of the paper book. The details of the payments are summarized hereunder:-
Particulars A.Y. 2008-09 A.Y. 2010-11 A.Y. 2011-12 Turnover 9,32,13,986/- 7,61,82,887/- 8,27,51,771/- Salary to M. 8,40,000/- 8,40,000/- 12,00,000/- Director Incentive 27,42,186/- 6,20,000/- 16,50,000/- Disallowance by 27,42,186/- 3,10,000/- ----- Assessing Officer 2.2. If the aforesaid figures are analyzed, it is noted that for Assessment year 2011-12, no disallowance was made by the ld. Assessing Officer himself with respect to the salary/incentives paid to the Managing Director, therefore, unless and until contrary facts are brought on record such a disallowance cannot be said to be justified.
More specifically when the remuneration (salary and incenting) to the Managing Director, increased from Rs.14,60,000/- to 28,50,000/- and the assessment was framed u/s 143(3) on 17/02/2014 by the DCIT for Assessment year 2011-12, therefore, the remuneration for the present Assessment year cannot be said to be excessive. The ratio laid down in Hive Communication Pvt. Ltd. vs CIT 353 ITR 200 (Del.) and DCIT vs Spark Hotels Pvt. Ltd. 52 SOT 395 (Del.), Hon'ble jurisdictional High Court in CIT vs Indo Saudi Services (Travel) Pvt. Ltd. 310 ITR 306 supports my view. The Hon'ble High Court held that where the sister concern was also assessed at higher rate and there was no attempt to evade tax, no disallowance u/s 40A(2) can be said to be justified. If the ratio laid down by Hon'ble High Court is kept in juxtaposition with the facts of the present appeal, it is noted that in the case of the assessee company, the total income is Rs.7,53,134/-, whereas, in the case of the Managing Director, it is Rs.1,41,26,411/-. The total tax paid by the assessee company is Rs.2,32,717/-, whereas, the Meaning Director paid Rs.42,66,181/-. The disputed expenditure in the case of the assessee company is Rs.3,10,000/- and if the same amount is disallowed in the case of the Managing Director, the revised income in the case of assessee company will be Rs.10,63,130/- and in the case of Managing Director, it will be Rs.1,38,16,410/-. The tax payable (if any), on the revised income in the case of the assessee company will be Rs.3,28,507/- and in the case of the Managing Director, it will be Rs.41,70,391/-. The difference of both will be Rs.95,790/-, meaning thereby, it is merely a tax neutral. It can be concluded that there is no loss to the Revenue. Thus, from this angle also, the assessee is having a good case in its favour.
2.3. Even otherwise, the matter has been clarified by CBDT Circular No.6-P dated 06/07/1968 stating that no disallowance is to be made u/s 40A(2) in respect of payments made to relatives and sister concern, where there is no attempt to evade tax. The Revenue has not established that higher remuneration was paid by the assessee company to the Managing Director, which can be assessed at higher rate, resulting in tax evasion, therefore, the stand of the Department cannot be said to be justified.
2.4. So far as, legitimate business needs of the assessee or the benefit derived by or accruing to the assessee, are concerned, these are not to be judged from the view point of the Assessing Officer but from the view point of a businessman (Voltamp Transformers P. Ltd. vs CIT (129 ITR 105, 113)(Guj.). In judging the unreasonableness or excessiveness of a particular payment for the purposes of section 40A(2)(a), it is essential that one should keep in mind the relevant consideration. The ratio laid down in CIT vs Skyline Industries Pvt. Ltd. (1985) 154 ITR 373 (MP), Kumar Engineers vs CIT 223 ITR 18, 22 (P &H), K.R. Motilal vs CIT 240 ITR 810 (Mad.), United Exports vs ACIT (2011)
330 ITR 549 (Del.), CIT vs Jyoti Industries (2011) 330 ITR 573 (P &H). In the present appeal, since the Assessing Officer himself allowed more remuneration in Assessment year 2011-12, therefore, there is no justification to make the disallowance. This ground of the assessee is allowed.
The next ground raised by the assessee pertains to ad-hoc addition of Rs.5 lakh, made by the Assessing Officer for the reason that day to day stock register was not maintained by the assessee. The stand of the assessee before me is that necessary stock register, for excise purposes was duly maintained by the assessee and necessary details were furnished before the Assessing Officer. The ld. DR disputed the claim of the assessee by explaining that the necessary details were not furnished, for which our attention was invited to the factual matrix recorded in the assessment order.
3.1. I have considered the rival submissions and perused the material available on record. On a questioning from the Bench, both parties fairly agreed that the ad-hoc addition may be reduced to 50% of the addition sustained by the Ld. Commissioner of Income Tax (Appeal). Considering the totality of facts and the agreement from both sides, the ad-hoc addition is reduced to Rs.2,50,000/- against Rs.5 lakh sustained by the Ld. Commissioner of Income Tax (Appeal), thus, this ground is partly allowed.
Finally, the appeal of the assessee is partly allowed.
This order was pronounced in the open in the presence of ld. representative from both sides at the conclusion of the hearing on 17/08/2016.