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Income Tax Appellate Tribunal, “D” Bench, Mumbai
Before: Shri B.R. Baskaran (AM) & Shri Pawan Singh (JM)
O R D E R Per B.R. Baskaran (AM) :-
These cross appeals are directed against the order dated 31-08-2012 passed by Ld CIT(A)-1, Thane and they relate to the assessment year 2009-10.
At the time of hearing, the Ld A.R did not press the ground relating to disallowance of expenses incurred in connection with Kosher Certification and hence the same is dismissed as Not Pressed. The remaining grounds relate to the following issues:-
2 M/s. D.K. Pharmachem Pvt. Ltd.
(a) Disallowance relating to the salary paid Smt. A.R. Bakshi confirmed by Ld CIT(A).
(b) Disallowance of sponsorship amount paid for sports activities.
The revenue is aggrieved by the decision of Ld CIT(A) in granting partial relief out of disallowance of salary paid to Smt. A.R.Bakshi.
The assessee company is engaged in the business of manufacturing of chemicals. The assessee is involved in Research and Development Activity (R & D) and hence it claimed weighted deduction u/s 35(2AB) of the Act in respect of R & D activity. The AO noticed that the assessee has not entered into an agreement as prescribed in sec. 35(2AB) of the Act and hence held that the assessee is not entitled to weighted deduction. When this fact was confronted to the assessee, it pleaded that the expenses may be allowed u/s 37(1) of the Act.
The AO noticed that the assessee has claimed R & D expenses to the tune of Rs.1,39,54,221/-, which included consultation fee of Rs.1,25,00,000/- paid to Smt. Alka Bakshi, who was the wife of the director named Shri Rakesh Bakshi. The AO noticed that the salary paid to Smt. Alka Bakshi constituted 93% of the total R & D expenses. When this fact was confronted to Shri Rakesh Bakshi, he submitted that Smt. Alka Bakshi is holding masters degree in Chemistry and further submitted that a reasonable amount may be allowed on account of her services rendered. The AO noticed that the assessee has not furnished any concrete evidence to substantiate the payment of Rs.1.25 crores made to Smt. Alka Bakshi. The AO noticed that Smt. Alka Bakshi was paid a salary of Rs.3.00 lakhs only in AY 2007-08. Accordingly he allowed a deduction of Rs.5.00 lakhs towards her salary and accordingly disallowed the balance amount of Rs.1.20 crores.
3 M/s. D.K. Pharmachem Pvt. Ltd.
The Ld CIT(A) noticed that the total R & D expenses incurred in AY 2007- 08, including the salary paid to Smt. Alka Bakshi, was Rs.38,30,801/-. The Ld CIT(A) noticed that the turnover of the assessee was Rs.12.24 crores in AY 2007-08. The same has gone down to Rs.9.87 crores in AY 2008-09 and then increased to Rs.24.78 crores in the year under consideration. It was stated before the Ld CIT(A) that the turnover has gone down in AY 2008-09 for the reason that certain key technical persons has left the assessee in that period and the said gap was filled by Smt. Alka Bakshi and hence the turnover has increased in AY 2009-10. Since the turnover has increased from 12.24 crores in AY 2007-08 to Rs.24.78 crores in AY 2009-10, the Ld CIT(A) took the view that the R & D expenses should also be doubled accordingly. Accordingly the Ld CIT(A) took the view that the consultation fee to Smt. Alka Bakshi should be about Rs.77.00 lakhs. Further, the Ld CIT(A) noticed that Smt. Alka Bakshi has declared returned income of Rs.98,88,101/- during the year. By placing reliance on the decision rendered by Hon’ble Supreme Court in the case of CIT Vs. Glaxo Smithkline Asia (P) Ltd (2010)(236 CTR 113), the Ld CIT(A) expressed the view that the disallowance u/s 40A(2)(b) is not called for, if the tax rate is similar in the case of payer and payee. Considering the total income of Rs.98,88,101/- declared by Smt Alka Bakshi and the fee of Rs.77.00 lakhs estimated by Ld CIT(A) on the basis of turnover, the first appellate authority held that the reasonable fee to Smt Alka Bakshi may be estimated at Rs.85.00 lakhs. Accordingly he gave direction to the AO.
The assessee is in appeal seeking further relief and the revenue is assailing the relief granted by Ld CIT(A).
We have heard the parties on this issue and perused the record. We notice that the Ld CIT(A) was under the impression that the rate of tax payable on the income of Rs.98.88 lakhs declared by Smt. Alka Bakshi is the same as payable
4 M/s. D.K. Pharmachem Pvt. Ltd. by the assessee and further the disallowance has been made u/s 40A(2)(a) of the Act. We notice that the AO has not referred to the provisions of sec. 40A(2)(a) of the Act, but only noticed that the fee paid to her was disproportionate to the services rendered by her. However, neither the assessing officer nor the Ld CIT(A) has examined the nature of service provided by Smt. Alka Bakshi to the company. We also notice that the assessee has also not furnished any material to substantiate the contribution made by Smt. Alka Bakshi to the Research & Development Activities. Further, the Ld CIT(A) has considered the turnover of AY 2007-08 and 2009-10 to determine the reasonableness. In our view, the same may not be right criteria, since the result of R & D activity may not immediately generate revenue. Hence, the reasonableness of fee is required to be determined on the basis of the contribution made by Smt. Alka Bakshi, the compensation that would have been to a third party for identical services etc. It was stated that some of the key research personnel has left the assessee and the said gap was filled by Smt. Alka Bakshi. In that case, the salary paid to those persons would also help to determine the reasonableness of the payment.
In view of the above, we are of the view that this issue requires fresh examination at the end of the AO. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to examine this issue afresh in the light of discussions made supra. The assessee is also directed to furnish the details of contribution made by Smt. Alka Bakshi to the assessee-company and also such other information or explanation that may be called for by the AO.
The next issue relates to the disallowance of sponsorship fee of Rs.80,000/- and Rs.1,00,450/- paid by the assessee. The Ld CIT(A) confirmed the disallowance, since the assessee could not prove that these expenses were 5 M/s. D.K. Pharmachem Pvt. Ltd.
incurred for the purpose of business. The Ld A.R submitted that these sponsorship programs will help the assessee to popularise its bulk drugs and also bring good will to the assessee. However, the assessee has not furnished any material to show that any advertisement was placed in the program.
We have heard the parties on this issue. If the assessee has placed any advertisement at the sports venue, it might help the assessee in its business and in that case these expenses are allowable as deduction. It is the responsibility of the assessee to show that the advertisement materials were placed at the sports venue. If no such advertisement was placed, then it is the responsibility of the assessee to show as to how this expenditure contributed to the business of the assessee. We notice that the assessee has not furnished these details. Hence, in the interest of natural justice, we are of the view that the assessee may be provided with one more opportunity to prove its case. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to examine the same afresh after affording necessary opportunity to the assessee.
In the result, the appeal filed by the assessee is treated as partly allowed and appeal of the revenue is treated as allowed for statistical purposes. Order has been pronounced in the Court on 7.9.2016