VVF LTD,MUMBAI vs. DCIT CEN CIR 39, MUMBAI

Firstly, we may take up appeal in Assessment Year 2002-03 which involves a solitary issue which is otherwise common in all the assessment years.

This appeal by the assessee is directed against the order of CIT(A)-41, Mumbai dated 13.10.2010, pertaining to the Assessment Year 2002-03, which in turn has arisen from the order passed by the Assessing Officer, Mumbai under section 143(3) r.w.s. 153A of the Income Tax Act, 1961 (in short ‘the Act’).

In this appeal, assessee has raised a solitary Ground of appeal, which reads as under :-

Before us, the learned representative for the assessee has assailed the action of lower authorities on varied grounds. Firstly, it is sought to be pointed out that Shri Faraz G. Joshi is a Director for the last 30 years and that the remuneration paid to him has always been allowed without any disallowance. It has been pointed out that even subsequently, from Assessment Year 2009-10 to Assessment Year 2012-13 such remuneration stands allowed in the scrutiny assessments made u/s 143(3) of the Act. Therefore, on the principles of consistency, it has been submitted that the disallowance is unwarranted. Secondly, it is pointed out that in the present case the disallowance has been made in the course of an assessment made u/s 153A of the Act and that there was no incriminating material found in the course of search to show that the disallowance was merited. It is pointed out that the only basis canvassed by the Assessing Officer is the 5 M/s. VVF Ltd. to 9030/Mum/2010 & 3588/Mum/2014 statement of Shri Faraz G. Joshi recorded at the time of search u/s 132(4) of the Act, which cannot be construed as an ‘evidence’ found in the search. Apart therefrom, it is pointed out that even on merits there is sufficient evidence on record to suggest that Shri Faraz G. Joshi has rendered services to the assessee-company as a Director. It has also been pointed that the payment of remuneration is within the limits prescribed by the Companies Act, 1956 and, therefore, it cannot be said to be patently excessive.

On the other hand, the ld. DR appearing for Revenue has reiterated the stand of the lower authorities in support of the case of Revenue. According to the ld. DR, the concerned Director had stated in the course of search that he was not attending office and nor was assigned any duties except consultation and, therefore, the salary paid could not be allowed as deduction.

We have carefully considered the rival submissions. In the instant case, the dispute relates to the allowability of salary paid to the Director amounting to Rs.36,00,000/-. Before we proceed to consider the reasons weighing with the Assessing Officer to disallow the expenditure, a brief background is necessary. The concerned Director, Shri Faraz G. Joshi has been explained to be a whole time Director and promoter-Director of the assessee-company since 1972. It has also been pointed out that the salary paid to him is duly approved by the Board of Directors and that it is within the limits prescribed under the Companies Act, 1956. Apart from the aforesaid, at page 105 of Paper Book, assessee has enumerated the nature of responsibilities

However, as per the Revenue, in the course of search a statement of Shri Faraz G. Joshi was recorded wherein in an answer to question no. 10 it was stated that he was not attending office and nor any duty was assigned to him except consultation. On this basis, the Assessing Officer has concluded that the said Director has not rendered any 7 M/s. VVF Ltd. to 9030/Mum/2010 & 3588/Mum/2014 services to the assessee-company and, therefore, the salary payment could not be considered as an expenditure incurred wholly and exclusively for the purposes of business. We find that assessee has appropriately explained the statement rendered by Shri Faraz G. Joshi. Even before us, the learned representative has pointed out that the answer of Shri Faraz G. Joshi has to be understood in the context of the question raised. In this context, our attention has been drawn to the relevant portion of the statement, which reads as under :-

It has been explained that the answer by Shri Faraz G. Joshi was in response to the question put to him which was as to whether he was involved in day-to-day management of the company. It was in this context the answer was made. So however, it is sought to be pointed out that the said Director was rendering consultation and advisory services which in fact is the role of a Director. Therefore, it was to be understood that services were indeed being rendered by the said Director to the assessee-company. In our considered opinion, the over- emphasis by the Revenue on the wordings of the reply of Shri Faraz G. Joshi has led to a wrong conclusion. We find that before the lower

In our considered opinion, having regard to the material on record, it is not a justifiable inference to reach that the salary payments to the Director are not wholly and exclusively for the purposes of business. In fact, there is no negation to the plea of assessee that for Assessment Years 2009-10 to 2012-13, such salary payments stood allowed and such assessments have been completed even after the search carried out on 3.1.2008. It is judicially well-settled that it is for the assessee to decide whether any expenditure should be incurred in the course of carrying on of its business. It is also a well-settled proposition that expenditure may be incurred voluntarily and without any necessity, and so long as it is incurred for the purposes of business, same is allowable as deduction even though assessee may not be in a position to show compelling necessity of incurring such expenditure. In support of the aforesaid proposition, reliance can be placed on the judgment of Hon'ble Supreme Court in the case of Sasoon J. David & Co. P. Ltd., 118 ITR 261 (SC).

Before parting, we may also refer to an additional Ground raised by the assessee on this aspect to contend that the action of Assessing Officer in disallowing the salary expenditure was not within the scope and ambit of Sec. 153A of the Act. Such plea has been raised with respect to Assessment Years 2002-03 to 2005-06 on the ground that the original assessment for such assessment years did not abate in terms of 9 M/s. VVF Ltd. to 9030/Mum/2010 & 3588/Mum/2014 second proviso to Sec. 153A(1) of the Act. As per the judgment of Hon'ble Bombay High Court in the case of Container Warehousing Corporation, 279 CTR 389 (Bom.), addition can be made in assessment finalized u/s 153A of the Act only on basis of incriminating material found during the course of search in the context of an assessment year where the original assessment does not abate. It is sought to be pointed out that insofar as the present case is concerned, the disallowance of salary payments is not based on any incriminating material found in the course of search but by merely relying on the statement of Shri Faraz G. Joshi, which would not constitute incriminating material for the purpose of making disallowance in an assessment finalised u/s 153A of the Act. In the course of hearing, the learned representative also referred to the following decisions :- i) Natvar Parikh & Co. Pvt. Ltd. vs. DCIT (ITA No. 2143, 2144, 2145/Mum/2009) (Hon'ble Mumbai ITAT) ii) Jagdish Chander Bajaj vs. ACIT (ITA No. 109/CHD/2007) (Hon'ble Chandigarh ITAT) to say that the statement of a person recorded in the course of search cannot be construed as an incriminating material found in the course of search.

In our view, though the aforesaid additional Ground raised by the assessee is germane to the issue, since we have already concluded that the expenditure incurred by way of salary payments is allowable expenditure u/s 37(1) of the Act, we do not find any necessity to adjudicate the said additional Ground.

In the end, we, therefore, conclude by holding that the material and evidence on record clearly suggests that services were rendered by Shri Faraz G. Joshi as Director of the assessee-company and that the salary paid to him cannot be disallowed. Therefore, we set-aside the order of CIT(A) and direct the Assessing Officer to delete the addition of Rs. 36,00,000/-. Thus, the assessee succeeds on this aspect.

In the result, appeal of assessee for Assessment Year 2002-03 vide is allowed.

Insofar as appeal of assessee for Assessment Year 2003-04 (ITA No. 9026/Mum/2010) is concerned, the only issue raised relates to disallowance of salary paid to the Director of Rs.60,00,000/-. It was a common point between the parties that the facts and circumstances are pari materia to those considered by us in assessee’s appeal for Assessment Year 2002-03, therefore, our decision in appeal of the assessee for Assessment Year 2002-03 shall apply mutatis mutandis in Assessment Year 2003-04 also.

Insofar as appeal of assessee for Assessment Year 2004-05 (ITA No. 9027/Mum/2010) is concerned, the Grounds of appeal raised by assessee relate to disallowance of salary paid to Director of Rs.68,07,800/- and expenditure of Rs. 7,35,000/- towards registration and stamp duty for issue of cumulative redeemable preference shares.

As regards Ground of appeal no. 1, it was a common point between the parties that the facts and circumstances are pari materia

The issue in Ground of appeal no. 2 relates to disallowance made by Assessing Officer of Rs.7,35,000/- representing payment made to Registrar of Companies towards registration and stamp duty for issuance of share capital. At the time of hearing, the learned representative submitted that the said Ground of appeal is not pressed, as such an addition had become final in the original assessment made u/s 143(3) of the Act, hence same is dismissed.

In the result, appeal of assessee for Assessment Year 2004-05 is partly allowed.

Insofar as appeal of assessee for Assessment Year 2005-06 (ITA No. 9028/Mum/2010) is concerned, the Grounds of appeal raised by assessee relate to disallowance of salary paid to Director of Rs.95,80,000/- and exclusion of sales tax set-off of Rs.39,91,000/- while calculating deduction u/s 10B of the Act.

As regards Ground of appeal no. 1, it was a common point between the parties that the facts and circumstances are pari materia to those considered by us in assessee’s appeal for Assessment Year 2002-03, therefore, our decision in appeal of the assessee for Assessment Year 2002-03 shall apply mutatis mutandis in Assessment Year 2005-06 also.

In relation to Ground of appeal no. 2, the relevant facts are that in the course of impugned assessment finalised by the Assessing Officer u/s 143(3) r.w.s. 153A of the Act, deduction u/s 10B of the Act in relation to Taloja unit was reduced to the extent of Rs.39,91,000/- by denying the benefit in relation to the amount of sales tax set-off. According to the Assessing Officer, benefit by way of sales tax set-off of Rs.39,91,000/- cannot be construed as an income derived from the industrial undertaking and, therefore, the claim of deduction u/s 10B has been scaled down. The said action of the Assessing Officer has further been affirmed by the CIT(A).

On the other hand, the ld. DR appearing for the Revenue has primarily relied upon the orders of authorities below and contended that the benefit by way of sales tax set-off is not eligible for deduction u/s 10B of the Act.

We have carefully considered the rival submissions. A perusal of the assessment order as well as the order of CIT(A) reveals that the pleas of assessee have not been appreciated in its proper perspective. Notably, CIT(A) in para 4.3 of his order has reproduced the submission of the assessee which was to the effect that such action of Assessing Officer was untenable in the impugned proceedings carried out u/s 143(3) r.w.s. 153A of the Act. The assessee has supported the said plea on the strength of an order passed by the Commissioner u/s 263 of the Act, which was required to be given effect to by the Assessing Officer by 14 M/s. VVF Ltd. to 9030/Mum/2010 & 3588/Mum/2014 amending the original assessment framed u/s 143(3) of the Act. We find that the aforesaid plea of assessee has been completely disregarded and action of the Assessing Officer has been upheld. After considering the factual matrix brought out by the assessee, we find that the impugned action of Assessing Officer is unsustainable in the eyes of law and is hereby set-aside. Thus, assessee succeeds in this Ground.

In the result, appeal of assessee for Assessment Year 2005-06 is allowed.

Insofar as appeal of assessee for Assessment Year 2006-07 (ITA No. 9029/Mum/2010) is concerned, the only issue raised relates to disallowance of salary paid to the Director of Rs.1,56,00,000/-. It was a common point between the parties that the facts and circumstances are pari materia to those considered by us in assessee’s appeal for Assessment Year 2002-03, therefore, our decision in appeal of the assessee for Assessment Year 2002-03 shall apply mutatis mutandis in Assessment Year 2006-07 also.

Insofar as appeal of assessee for Assessment Year 2007-08 (ITA No. 9030/Mum/2010) is concerned, the Grounds of appeal raised by assessee relate to disallowance of salary paid to Director of Rs.3,00,00,000/- and inflated purchases of Rs.1,11,42,675/-.

As regards Ground of appeal no. 1, it was a common point between the parties that the facts and circumstances are pari materia to those considered by us in assessee’s appeal for Assessment Year 2002-03, therefore, our decision in appeal of the assessee for 15 M/s. VVF Ltd. to 9030/Mum/2010 & 3588/Mum/2014 Assessment Year 2002-03 shall apply mutatis mutandis in Assessment Year 2007-08 also.

Insofar as Ground of appeal no. 2 is concerned, the relevant facts are as follows. In the course of search certain documents were seized showing details of action conducted by the Directorate of Revenue Intelligence (DRI), Gandhidham, wherein it was concluded that assessee was importing PFAD and declaring the same as Acid Oil in order to avail benefit of Advance Licence Scheme. Based on the DRI report, Assessing Officer concluded that during the year under consideration assessee had mis-declared 5499.84 MT of PFAD as Acid Oil which has resulted in inflation of purchases, and @ Rs.2026/MT it worked out to Rs.1,11,42,675/-. Accordingly, Assessing Officer made an addition of Rs.1,11,42,675/- to the returned income. The said action of Assessing Officer has further been affirmed by the CIT(A). Against such a decision, assessee is in further appeal before us.

On the other hand, the ld. DR has not controverted the factual matrix brought out by the assessee and has merely relied upon the orders of the authorities below.

We have carefully considered the rival submissions. The relevant discussion in the order of Assessing Officer as well as the CIT(A) clearly shows that the only basis for the impugned addition is the findings of DRI. There is no independent finding of the Assessing Officer on the basis of any material to say that assessee has inflated its purchases by declaring the import of PFAD as that of Acid Oil. In fact, the order of CESTAT dated 4.12.2014 (supra), whose copy has been placed on record, upholds the contention of assessee that it has imported Acid Oil and not PFAD. Quite clearly, since the basis on which the addition made by the Assessing Officer itself does not remain, the addition of Rs.1,11,42,675/- is directed to be deleted. Therefore, on this aspect also assessee succeeds.

In the result, appeal of assessee for Assessment Year 2007-08 is allowed.

Insofar as appeal of assessee for Assessment Year 2008-09 (ITA No. 9024/Mum/2010) is concerned, the only issue raised relates to disallowance of salary paid to the Director of Rs.1,90,00,000/-. It was a common point between the parties that the facts and circumstances are pari materia to those considered by us in assessee’s appeal for 17 M/s. VVF Ltd. to 9030/Mum/2010 & 3588/Mum/2014 Assessment Year 2002-03, therefore, our decision in appeal of the assessee for Assessment Year 2002-03 shall apply mutatis mutandis in Assessment Year 2008-09 also.

The only other appeal remaining is which is arising out of order of CIT(A)-41, Mumbai dated 28.02.2014, pertaining to the Assessment Year 2004-05, which in turn has arisen from the order passed by the Assessing Officer, Mumbai under section 271(1)(c) of the Act.

In this appeal, the solitary issue raised is with regard to penalty of Rs.27,05,872/- imposed u/s 271(1)(c) of the Act.

The relevant facts are that the Assessing Officer imposed penalty u/s 271(1)(c) of the Act in relation to two disallowances made in the assessment finalised u/s 143(3) r.w.s. 153A of the Act, namely, disallowance of Director’s salary and fees paid to ROC for issue of shares.

Insofar as the levy of penalty on the disallowance of Director’s salary of Rs.68,07,500/- is concerned, the same is liable to be set-aside inasmuch as the addition itself has been deleted by us in the earlier paragraphs while disposing of assessee’s appeal in (supra).

The second leg of the penalty is with regard to disallowance of expenditure of Rs.7,35,000/- paid to Registrar of Companies towards registration and stamp duty for issue of cumulative preference shares.

On the other hand, the ld. DR appearing for the Revenue contended that the claim made for deduction of expenditure relating to payment made to the Registrar of Companies towards registration and stamp duty was a wrong claim as it related to issuance of share capital.

We have carefully considered the rival submissions. In the background of the factual matrix brought out by the learned representative for the assessee and also the fact that there is no material referred by the Revenue to have been found in the course of search in relation to the impugned issue, we find that the levy of penalty is unjustified. It would also not be out of place to mention here that once on the same issue the Assessing Officer did not initiate penalty at the time of making the disallowance in the course of original assessment proceedings u/s 143(3) of the Act, then without there being any material found in the course of search, repetition of the same disallowance in the proceedings u/s 143(3) r.w.s. 153A of the Act would not justify levy of penalty u/s 271(1)(c) of the Act. Thus, on this aspect also we find no reason to uphold the penalty levied u/s 271(1)(c) of the Act.

As a consequence, we set-aside the order of CIT(A) and direct the Assessing Officer to delete the penalty imposed u/s 271(1)(c) of the Act. Accordingly, appeal of the assessee is allowed.

Resultantly, the captioned appeals of assessee are allowed, as above.