PORTMAN ADVISORY P. LTD,MUMBAI vs. DCIT 3(2), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार PER RAJENDRA, AM- अनुसार Challenging the order,dt.16.06.2014 of CIT(A)-4,Mumbai, the assessee had filed the present appeal.Assessee-company,engaged in the business of providing consultancy and advisory related services to project management services in India,filed its return of income 30.09.2010, declaring total income at Rs.2,22,59,801/-.The Assessing Officer(AO)completed the assessment order u/s.143(3)of the Act,on 13.02.2013,determining its income at Rs.1.63 Crores.

2.First Ground of appeal deals with upholding the disallowance of sum of Rs.58.66 lakhs out of the total personnel cost of Rs.1.53 crores. During the assessment proceedings,the AO found that during the year the assessee had increased salary expenses of its employees in the month of February, 2010 and March, 2010, that it had increased its salary expenses almost 60% over the corresponding expenses in the earlier financial year.The assessee was asked to justify the increase in salary.Explanation,given by the assessee,was not accepted by the AO, as it had increased the salary to its employees in spite of the fact that there was no increase in the income during the year and also in the subsequent years.He further held that no nexus had been established between the expenditure incurred and the business of the assesse, that the consultancy income earned by the assessee during the year was Rs.5,82,652/-, that the employees of the company had not made any efforts to increase the income throughout the 5141/M/14-Portman AdvisoryPLtd. year and therefore increase in salary was not justifiable from the businessman point of view, that the increase in salary expenses had not been incurred wholly and exclusively for the purpose of assessee’s business.

3.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority(FAA).Before him,the assessee argued that salary expenditure was inclusive of various entitlements and allowances such as annual bonus, leave travel allowance and medical allowances. It provided the breakup of salary cost of the employees paid to key managerial personnel and executives for the year under consideration, that the assessee company was incorporated in April 2008, that during the 1st year of contract it secured a contract to provide consultancy services to an Indian company, that the FY. 2008-09 was the year of global meltdown, that the project to be undertaken by the Indian company did not materialise and was abandoned, that accordingly the assessee could not generate revenue, that with the efforts of its employees the assessee secured a project management consultancy contact with a company based in Pune, that the increase in employee cost was to motivate the employees to work harder,that it was a commercial judgment to give increment to its employees,that to decide the issue of allowability of expenditure test of commercial expedi - ency had to be considered,that the reasonableness of expenditure has to be decided from the point of view of the businessman and not of the AO,that in any consultancy business the only resourse were the employees, that the salary expenditure was incurred wholly and exclusively for the purpose of business and to earn revenue. After considering the submission of the assessee,he held that out of Rs.1.53 crores,expense of Rs.1.25 crores had been debited under the head salary, bonus etc. and was paid to Rahul Anand,that excessive expenditure was incurred under the head personnel cost though the income of the assessee had reduced from Rs.15.03 lakhs to Rs.5.82 lakhs, ,that on the one hand income of the assessee had decreased from 100% to 38% and on the other hand its expenses increased from 100% to 161.61%, that it had earned Rs. 5,82,652/- but enhanced its personnel cost by Rs. 58,66,346/-, that no businessman of ordinary prudence will do that,that there was no co-relation between the expenses incurred and the income earned,that no nexus had been established between the expenditure incurred and the business of the assessee ,that the excessive expenditure could not be said to have been incurred or laid out wholly and exclusively for the purpose of assessee's business,that the assessee had enhanced the remuneration paid to its key managerial personnel/directors by giving an unreasonable increase without gaining anything on account of profit in the business,that it had been 2

5141/M/14-Portman AdvisoryPLtd. incurring losses year after year,that no such increase was granted to other Managerial staff in the company.Finally,he upheld the order of the AO.

4.During the course of hearing before us, the Authorised Representative(AR) reiterated the arguments that were advanced before the FAA and contended that the payments in question were not part of the salary, that they were allowances, that the disallowance made/confirmed by the AO/FAA was against the provisions of the Act.He referred to the pages 81-87 of the Paper book(PB). The Departmental Representative (DR) supported the order of the FAA.

5.We have heard the rival submissions and perused the material before us.We find that the assessee had debited Rs.1,53,88,845/- in the FY.2009-10 in comparison to Rs.95,22,499/- in the FY.2008-09,under the head Personnel cost,that out of the said expenses of Rs. 1,53, 88, 845/-,expenses of Rs. 1,24,39,835/- had been debited under the head salary, bonus and other allowances and paid,that the AO disallowed the expenditure holding it to be excessive and unreasonable,that the AO and the FAA compared the figures of expenses and the income for the year under appeal with other years,that both were of the view that the expenditure was not incurred wholly and exclusively for the business of the assessee .

5.1.The short issue to be decided in the case before us is as to whether the AO and the FAA were justified in disallowing the expenditure incurred by the assessee during the year under consideration. The only objection of both the authorities is that the assessee was suffering loss but had paid higher salary to its employees.It is not the case of the AO that payment was not made or that the person whom the payment was made were non-existent.Thus,the genuineness of the payment or the recipients is not in doubt.Their objection is about the justification of incurring the expenditure-i.e.why was the assessee not reducing his expenses proportionately when in was earning lesser income.In our opinion,there is a basic and fundamental flaw in the approach of the AO and the FAA.They have tried to step in to the proverbial shoes of the businessman. It is not their domain to decide as to how much expenditure is to be incurred or under which it head it has to incurred.Assessee has to decide its business needs and no other person is authorised to do so.Whether or not to incur any expenditure or how much expenditure to be incurred is the prerogative of an assessee.The employee are not hit by the provisions of section 40A of the Act,so,the FAA was not justified in questioning the reasonableness of the expenditure.Both of them have ignored the principle of commercial expediency. Phrase commercial expediency would include such purpose as is 5141/M/14-Portman AdvisoryPLtd. expected by the assessee to advance its business interest and may include measures taken for preservation, protection or advancement of its business interests.AO has no role to decide the ‘Laxman-Rekha’ of ‘preservation, protection or advancement of his business interest.’ Here,we would like to refer to the case of Yum Restaurants India P. Ltd.( 371 ITR 139)of the Hon’ble Delhi High Court wherein basic principles regarding allowing an expenditure and limits of the AO.s have been deliberated upon as under:

“In examining a claim for deduction under section 37(1) of the Income-tax Act, 1961, on the ground of commercial expediency, what is to be seen is not whether it was compulsory for the assessee to make the payment but whether it was of commercial expediency. As long as the payment is made for the purposes of the business and not by way of penalty for infraction of any law, the payment would be allowable as a deduction. The commercial expediency of a businessman’s decision to incur a particular expenditure cannot be tested on the touchstone of strict legal liability to incur such expenditure. Such decisions are to be taken from a business point of view and have to be respected by the authorities, regardless of the fact that it may appear, to the latter, to be expenditure incurred unnecessarily or avoidably.”

In the matter of Discovery Communication India(370 ITR 57)the Hon’ble Delhi High Court has dealt the issue before us,in detail and has held as follow: The words “wholly and exclusively” though not synonymous and are sufficiently wide and not restricted to expenditure solely incurred for the purpose of earning of profits. For an amount to be treated as an admissible expenditure under section 37(1) of the Income-tax Act, 1961, the amount should be for the purpose of business and not for the purpose of earning income. Whether an expenditure was wholly and exclusively incurred or laid out for the purpose of business or profession must be determined from the assessee’s perspective and choice. It is subjective. What one assessee may want to incur, another may not like to incur. The quantum may also differ and vary. Section 37(1) does not curtail or prevent an assessee from incurring an expenditure which he feels and wants to incur for the purpose of business. Expenditure incurred may directly or indirectly benefit the business in the form of increased turnover, better profit, growth, etc. As long as the expenditure incurred is “wholly and exclusively” for the purpose of business, the Assessing Officer cannot by applying of his own mind, disallow whole or a part of the expenditure. The Assessing Officer cannot question the reasonableness by putting himself in the arm-chair of the businessman and assume status or character of the assessee.(emphasis by us).

A perusal of the above two judgments clearly show that reasonableness of an expenditure cannot and should not be the deciding factor while allowing an expenditure u/s.37 of the Act. In the case before us,both the authorities have misdirected themselves and ventured in to prohibited territory.Therefore,their action cannot be endorsed.Reversing the order of the FAA, we decide the effective ground of appeal in favour of the assessee.

5141/M/14-Portman AdvisoryPLtd.