CONCORD ENVIRO SYSTEMS (P ) LTD,MUMBAI vs. ACIT CC 10, MUMBAI

The brief facts of the case are that the assessee company belong to Rochem separation Systems Group , which was covered u/s 132 of the Act in the earlier years. The group is engaged in the business of water purification systems and chemicals manufacturing and trading. There are three Directors in the assessee company namely (i) Shri Bimal Goel, (ii) Mrs. Nidhi Goel and (iii) Mrs. Namrata Goel . It was submitted by the assessee company that Mrs. ITA 3917/Mum/2013 3 Nidhi Goel and Mrs. Namrata Goel are Directors since 1-12-2005 and as regards their qualification it was submitted that Mrs. Namrata Goel is MBA in Finance and Mrs. Nidhi Goel is Bachelor of Management Studies. The salary paid to the Directors during the year was Rs. 44,50,588/- to each of the Directors i.e. Mrs. Namrata Goel and Mrs. Nidhi Goel , totaling Rs. 89,01,115/-. As per the record the total income shown by the assessee company during the year was Rs. 7,10,11,150/- from sales and Rs. 8,05,733/- from others. It was observed by the A.O. from the Profit & Loss account that the assessee company has incurred expenses on account of wages and salaries amounting to Rs. 94,622/- of which the monthly average comes to Rs. 7,885/- which is a meager figure, whereas the remuneration paid to the directors was at Rs. 89,01,115/-. On perusal of the Profit & Loss Account produced by the assessee company, it was observed by the A.O. that the assessee company has paid rent to Rochem Separation Systems India Private Limited for using space and set up at Vasai factory . The assessee company is also showing its address at 101,Dheeraj Arma, Anand Kanekar Marg, HDIL Tower, Bandra(East) , Mumbai which is property owned by M/s Rochem Separation Systems and other group companies for which no rent was apparently paid by the assessee company as per the AO. It was observed by the AO from the Profit and Loss Account that it appears that there is merely a transfer of some business of the parent/other group company owned by the other family members i.e. M/s Rochem Separation Systems India Pvt. Ltd. . The AO observed from the Resolution submitted by the assessee company that vide Board of Directors Resolutions dated 2-4-2008, the Board of Directors Resolved the monthly remuneration of the Directors as under:-

Aggrieved by the assessment orders dated 29.12.2011 passed by the A.O. u/s. 143(3) of the Act, the assessee company has filed its first appeal before the learned CIT(A).

The learned CIT(A) after considering the rival submission and other material placed on record observed that the assessee company has vide its letter dated 10th October, 2012 requested for admission of additional evidence in the form of copy of two Board of Directors Resolutions dated 15th March, ITA 3917/Mum/2013 9 2006 approving the payment of commission on turnover to the working Directors of the company and the Board of Directors Resolution dated 4th April, 2007 increasing the commission to 5% to each of the working Directors. The learned CIT(A) further observed that the assessee company has submitted that the A.O. made addition without show causing to the assessee company and without giving opportunity to explain the commission on turnover paid by the assessee company to the Directors namely Mrs Nidhi Goel and Mrs Namrata Goel based on the Board of Directors Resolution passed in financial years 2006-07 & 2007-08 respectively. The assessee company prayed before the learned CIT(A) for admission of the additional evidences and accordingly a copy of the assessee company’s application along with additional evidence so submitted was forwarded by the learned CIT(A) to the A.O. for his comments. The A.O. submitted the remand report and the same was forwarded to the assessee company for its rejoinder. In the remand report, the A.O. objected to the admission of the additional evidences and mentioned that the assessee company was asked to file the details with regard to details of commission payment, TDS deducted, copies of the Resolutions passed during the last two years and copy of all Board Meetings held in the previous year 2008-09 relevant to the assessment year 2009-10. The assessee company vide letter dated 15th November, 2011 had submitted that the assessee company had paid commission on turnover to only one company i.e. M/s MMP Filteration Pvt. Ltd. on which due tax was deducted at source but details of the Board meeting and Resolution(s) passed were not furnished, despite further opportunity being granted to the assessee company. Thus the A.O. stated that it is not a case where the assessee company was not afforded sufficient opportunity to present the case and the assessee company’s contention is wrong, baseless and untrue. Thus as per the AO, Rule 46A(1)(c) of Income Tax Rules, 1962 places a condition on admissibility of additional evidence when the assessee company was prevented by sufficient cause from producing the evidence before the A.O. In this case, the assessee company ITA 3917/Mum/2013 10 has not placed on record any material to show that the assessee company was prevented by sufficient cause from producing the Board of Directors Resolutions for the last two years before the A.O. at the time of the assessment proceedings. Thus, the A.O. in his remand report requested the learned CIT(A) not to admit any additional evidences submitted by the assessee company.

It was submitted by the assessee company in rejoinder to remand report that AO erred in concluding that the commission is paid only to M/s MMP Filtration Pvt. Ltd. of Rs.22,950/- , while commission on turnover to Directors was also paid which was forming part of the Remuneration to the Directors. The entire remuneration to Directors including commission is included in Remuneration and commission on turnover is not shown separately in the books of accounts. It was submitted that vide letter dated 13th December, 2011, the assessee company submitted the copies of the Board Resolutions passed during the period relevant to this assessment year along with the copies of the TDS returns. It was submitted that the A.O.’s objection is incorrect as the assessee company has submitted the copies of Board of Directors Resolutions as were asked for vide its reply dated 13th December, 2011 and it is incorrect to state that the assessee company skipped the production of the Board of Directors Resolution for the financial year 2008-09 relevant to the assessment year 2009-10. It was submitted that all the details regarding the remuneration paid to the Directors were furnished such as copy of ledger account, copies of the Form 16 , the Director’s income tax returns and the copies of the TDS returns to the A.O. . The said commission to Directors formed part of the remuneration and was added to the total remuneration paid to the Directors. The description on the qualification of the Directors and the details of the payment to Directors were also furnished which were again furnished before the learned CIT(A) also. It was submitted that Mrs. Namrata Goel and Mrs. Nidhi Goel were Directors ITA 3917/Mum/2013 11 and they were paid salary during the year along with the commission on sales. Mrs. Namrata Goel is MBA (Finance) and Mrs. Nidhi Goel is a Bachelor of Management studies from Mumbai and they were actively engaged in the business activities of the assessee company. It was submitted that in the preceding year also they were the same Directors of the assessee company and were paid the remuneration inclusive of commission on turnover. However, in the impugned assessment year, the third Director Mr. Bimal Goel was not paid any remuneration from the assessee company as he was looking after the business of M/s Rochem Separation Systems (India) Pvt. Ltd. and was paid salary and professional fee from Rochem Separation Systems (India) Pvt. Ltd. till December, 2008 and thereafter he was not looking after any business activities of M/s Rochem Separation Systems (India) Pvt. Ltd. as well as the assessee company. It was submitted that the travelling expenses incurred by the Directors was in the normal course of business. It was submitted that if the A.O. has any doubt about the genuineness of the remuneration paid, he should have given opportunity to the assessee to prove the same but the A.O. has not provided any opportunity before making the disallowance. Copies of the Board of Directors Resolutions passed in the preceding year were also submitted before the learned CIT(A) as additional evidences . It was submitted that in the assessment year 2008-09 also the commission was paid to the Directors on the basis of Board of Directors Resolution which was allowed by the Revenue in scrutiny assessment u/s 143(3) of the Act. In the financial year 2007-08 Board of Directors Resolution was passed for increase in the rate of commission. It was stated by the assessee company that the commission is paid to the Directors for their efforts which resulted into procurement of goods at a cheaper rate as compared to goods imported earlier at higher price to be sold to Rochem Separation Systems (India) Pvt. Ltd. . The A.O. has not provided any opportunity to the assessee company to prove that the remuneration to Directors was not excessive and cannot be disallowed u/s 40A(2)(b) of the Act.

The ld. CIT (A) observed that the assessee company has admitted in his rejoinder that the A.O. had asked for the Board Resolutions for the last two assessment years, thus, the contention of the assessee company is incorrect. The A.O. disallowed an amount of Rs. 71,01,116/- as unauthorized and in excess of permitted salary. It was also contended by the A.O. that the Directors are wives of other two Directors of the main group company M/s Rochem Separation Systems (India) Pvt. Ltd. and the assessee company is operating its business from the office of main group company. It is also recorded by the A.O. that these two Directors are not technically qualified for manufacturing of the technical equipments which the assessee company manufactured and sold. It is also recorded by the A.O. that the entire circumstances of the assessee company that maintaining its office in the building of main group company having factories/manufacturing facilities in ITA 3917/Mum/2013 13 the factory of the main group and overall relationship with the directors of the company of the main group are only with the purpose to pass over the benefits to the family members. Thus, the learned CIT(A) held that the addition was rightly made and also the additional evidence need not be admitted. The ld. CIT(A) observed that the case of the assessee company does not fall in any of the categories prescribed under Rule 46A of the Income Tax Rules, 1962 and in the light of this, the additional evidence sought to be admitted was rejected. In support, the learned CIT(A) relied on the following decisions in support of his decision not to admit additional evidences :

The learned CIT(A) adjudicated ground No. 1 whereby it was agitated by the assessee company that the AO has erred in stating that the activities shown by the assessee company were actually part of the activities of the main group company i.e. Rochem Separation Systems (I) P. Ltd. which has been transferred/recorded in the name of the assessee company with the purpose to pass over benefits to the family members and also to inflate the expenses and the assessee company prayed for reversing the said finding of the AO. It was held by the learned CIT(A) that as per the submissions of the assessee company’s representative, the assessee company is not serious in prosecuting this ground of appeal and hence this ground was dismissed by the learned CIT(A).

Regarding the next ground of appeal

The next ground relates to the disallowance of motor car expenses of Rs. 2 lacs. The learned CIT(A) observed that the A.O. has recorded a finding that no reasonable cause was furnished by the assessee company in support of the expenditure by way of adducing sufficient evidence but the assessee company failed to show that the expenditure was wholly and exclusively incurred for the purpose of assessee company’s business especially in view of the fact that there was an overlapping of the business operations. The learned CIT(A) held that mere production of certain vouchers will not go to show that the expenditure was incurred wholly and exclusively for the purpose of business and accordingly this ground raised by the assessee company was dismissed, vide appellate orders dated 28-02-2013

Aggrieved by the appellate orders dated 28-02-2013 of the learned CIT(A), the assessee company is in appeal before the Tribunal.

With respect to the ground no 1 raised by the assessee company , whereby the assessee company has agitated that the learned CIT(A) has erred in confirming the averment of the AO stating that the activities shown by the assessee company were actually part of the activities of the main group company i.e. Rochem Separation Systems (I) P. Ltd. which has been transferred/recorded in the name of the assessee company with the purpose to pass over benefits to the family members and also to inflate the expenses and the assessee company prayed for reversing the said finding of the AO. we have observed that the assessee company has not presented any contentions before the learned CIT(A) and the learned CIT(A) dismissed this ground at threshold for non-prosecution by holding that the assessee company is not serious in pursuing this ground of appeal. The assessee company has once again chosen not to produce before the Tribunal any cogent material and evidences to substantiate its averments to enable the Tribunal to adjudicate this ground of appeal but learned counsel for the assessee has submitted that ITA 3917/Mum/2013 17 this ground be adjudicated based on the material on record. The Revenue has held that the assessee that it is merely a front company of Rochem Seperation Systmes India Private Limited being created to inflate expenses and pass on the benefits to the family members. It is the contention of the Revenue that the office and factory space of the Rochem Seperation Systems Private Limited is used by the assessee company and perusal of the profit and loss account reveals that manufacturing process of other company is being used. It was observed by the Revenue that for manufacturing carried on by the assessee company , no wages and labour charges were paid and similarly no contract manufacturing charges are paid for carrying on manufacturing activities as detailed in the assessment order of the AO passed u/s 143(3) of the Act . It is the contention of the Revenue that the assessee company does not have any technically qualified manpower to carry out manufacturing of technical equipments manufactured and dealt with by the assessee company. The Directors of the assessee company are also not technically qualified to carry out the manufacturing of technical equipments. In reply, the assesse company has merely stated before the authorities below that it is getting the products in CKD form in the factory and finish the same there in the factory. It was submitted that business results of the assessee company and its associated company are accepted by the Revenue. In our considered view, to adjudicate this ground of appeal requires the detailed analysis of the working of business activities and processes employed by the assesssee company, infrastructure employed and/or utilized by the assessee company, modus operandi of operations carried out by the assessee company which required understanding, evaluation and appreciation of the entire spectrum of business operations, the manufacturing processes deployed and utilized in the business by the assessee company etc., which required examination, verification and enquiry before adjudicating this ground of appeal on merits. The assessee company has not placed any such material before us to adjudicate the said ground of appeal on merits. In this regard, we are of the ITA 3917/Mum/2013 18 considered opinion that this issue needs to be set aside and restored to the file of the AO for de-novo determination on merits and the assessee company is directed to appear before the AO and present all the relevant evidences/explanations and material to support its contention so that the matter can be determined de-novo on merits by the AO after considering all the relevant evidences, material and explanations submitted by the assessee company and after conducting due enquiry, examination and verification as may deem fit by the AO. The ld. D.R. has also not objected to the same. We order accordingly.

With respect to the ground relates to the disallowance of Rs. 71,01,611/- on account of commission on turnover paid to the Directors forming part of the Remuneration of the Directors, the learned Counsel for the assessee company reiterated the submissions made before the authorities below which are not repeated for sake of brevity and submitted that the additional evidence produced by the assessee company before the learned CIT(A) by way of Board of Directors Resolution approving the payment of commission on turnover to the Directors goes to the root of the matter for deciding the issue and the learned CIT(A) erred in not admitting the same on technical grounds while the same ought to have been admitted in the substantial interest of justice before adjudicating the issue by the learned CIT(A). The ld. Counsel for the assessee company accordingly prayed that the additional evidence may be admitted as the learned CIT(A) erred in not admitting the same. The learned Counsel submitted that the A.O. asked the assessee company to submit only the Board of Directors Resolutions passed in the previous year relevant to this assessment year which is evident from the point No. 11 of the notice issued u/s 142(1) of the Act , hence the assessee company submitted copies of the Board of Directors Resolutions passed during the previous year relevant to this assessment year along with copies of TDS return in Form no 24Q whereby the commission income was ITA 3917/Mum/2013 19 duly included in TDS return vide letter dated 13th December, 2011 and due taxes were deducted at source and deposited with the Revenue on the said commission on turnover paid to the Directors. The assessee company submitted the copies of Board of Directors Resolutions passed during the previous year relevant to the assessment year before the AO during the assessment proceedings. Copies of Board of Directors Resolutions passed in the preceding years had been submitted before the learned CIT(A) as additional evidences, as the A.O. did not specifically provided any opportunity to the assessee company to explain as to why the amount paid to the Directors was not excessive before invoking provisions of Section 40A(2)(b) of the Act. These additional evidences were not admitted by the learned CIT(A) also which has caused severe prejudice to the assessee company was the contention of the learned counsel for the assessee company. It was submitted that in the assessment year 2008-09 the commission on turnover paid to the Directors based on the basis of Board of Directors Resolution passed in financial year 2006-07 was allowed in the assessment framed u/s 143(3) of the Act. In financial year 2007-08 Board of Directors Resolution was passed for increase in the rate of commission on turnover to 5% for each of the Directors. Thus, the ld. Counsel prayed that these additional evidences submitted before the learned CIT(A) should be admitted. The ld. Counsel relied on the decision of Hon’ble Bombay High Court in the case of CIT v. Indo Saudi Services (Travel) (P.) Ltd. [2008] 219 CTR 562 (Bom) and also the CBDT Circular No. 6-P dated 06-07-1968. It is also the averment of the learned counsel for the assessee that the AO has not given sufficient opportunity of being heard to the assessee company. The learned counsel submitted that the taxes were duly paid by the Directors on the total remuneration including commission on turnover and no loss to the Revenue has occurred due to this commission on turnover paid to the Directors. The ld. Counsel also drew our attention to the paper book whereby all the necessary evidences were placed on record such as Form No 16 issued by the assessee company to the two ITA 3917/Mum/2013 20 Directors to whom salary including commission was paid, copies of income tax return of both the Directors for the assessment year 2008-09 and 2009- 10, copies of ledger account of the assessee company whereby the salary and commission to Directors were credited, copies of the resolutions of the Board of Directors passed by the assessee company along with copy of assessment order in the case of the assessee company for assessment year 2008-09 were all placed in the paper book filed with the Tribunal. The learned counsel submitted that the commissions were paid to the Directors in view of cost saving in purchase of material due to their efforts vis-à-vis costs incurred earlier on imports. The learned counsel submitted that the Director Remuneration was duly approved and adopted by the shareholders in the annual general meeting while adopting and approving the annual accounts. It was submitted that with respect to the other grounds of appeal, the learned counsel relied upon the submissions made before the authorities below and submitted that the details are placed in paper book filed with the Tribunal and the matter may be adjudicated on merits

The ld. D.R. submitted that the assessee has not submitted the copy of resolution authorizing payment of commission during the assessment proceedings before the AO despite being specifically asked by the AO to provide the same . The expenditure incurred by the assessee was excessive and unreasonable compared to the fair market value of the services rendered by the directors in question who were technically unqualified and hence the AO has rightly invoked provision of Section 40A(2)(b) of the Act. No supporting evidence has been produced by the assessee to prove the genuineness of the claim and as such the A.O. has rightly disallowed the claim of the assessee.The ld. DR submitted that the principles of res-judicata are not applicable to the income tax proceedings and even if the said remuneration including commission was allowed in the preceding year, the same does not bind the Revenue to allow in the instant year and the claim of ITA 3917/Mum/2013 21 the assessee is to be allowed on merits in accordance with law despite also of the fact that the Directors have included the same in the return of income and paid due taxes to the Revenue , otherwise Section 40A(2)(b) of the Act will become otiose. It is the finding of the authorities below that the remuneration paid to the Directors Mrs Nidhi Goel and Mrs Namrata Goel is excessive and un-reasonable as they are technically unqualified. The assessee does not have any other employee as meager salary of Rs.94,622/- is paid for other employees of the company for the entire previous year relevant to the assessment year. The assessee was called upon by the AO to produce all resolutions passed for payment of remuneration including commission to the Director but the assessee did no submitted the Resolutions before the AO despite sufficient opportunity of being heard being given and learned CIT(A) rightly refused to admit the additional evidences as the case does not fall under exceptions provided under Rule 46A of Income Tax Rules, 1962.

We have considered the rival submissions and also perused the material available on record. Looking into the facts and circumstances of the case, in our considered view, the learned CIT(A) should have admitted the additional evidences filed by the assessee during appellate proceedings being resolutions authorizing the payment of remuneration including commissions to the Director and then examined and verified these additional evidences on merits before adjudicating the issue, because the A.O. has not show caused the assessee before making disallowance to explain the commission paid by the assessee to the Directors based on the resolution passed in financial years 2006-07 & 2007-08 respectively and its nexus with the business of the assessee being spent wholly and exclusively for the purpose of the business. The genuineness and reasonability of the commission on turnover has been doubted by the Revenue. We may hasten to add that we have already set aside the ground no1 to the file of the AO for de-novo determination of the issue on merits as set out above in preceding para’s, whose decisions also ITA 3917/Mum/2013 22 shall have bearing in deciding this issue on merits. We accordingly set aside the order of the ld. CIT(A) and restore the issue back to the file of the A.O. for fresh determination of the issue on merits after considering the additional evidences , material and explanations filed by the assessee in its defense. The assessee is directed to appear before the A.O. with all the necessary evidences and material to prove the genuineness and reasonability of the commission on turnover of Rs.71,01,116/- paid to the two Directors namely Mrs. Nidhi Goel and Mrs. Namrata Goel. This disposes of ground no 2 and 3 raised by the assessee company in memo of appeal filed with the Tribunal. We order accordingly.

In the result, the appeal filed by the assessee company in ITA N0. 3917/Mum/2013 for the assessment year 2009-10 is allowed for statistical purposes.