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Income Tax Appellate Tribunal, SURAT BENCH, SURAT
Before: SHRI PAWAN SINGH, JM & DR. A. L. SAINI, AM
आदेश / O R D E R PER DR. A. L. SAINI, AM: Captioned appeal filed by the Revenue, pertaining to Assessment Year (AY) 2016-17, is directed against the order passed by the Learned Commissioner of Income Tax (Appeals)-4, Surat [in short “the ld. CIT(A)”], in Appeal No.CIT(A),Surat-4/10678/2018-19, dated 31.05.2023, which in turn arises out of an assessment order passed by Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), dated 28.12.2018.
The grounds of appeal
raised by the Revenue are as follows:
1. On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition of Rs.10,60,911/- made by the assessing officer u/s 14A of the I.T. Act observing that the assessee having own fund on 31.03.2016 for making investments which generate exempt income despite the fact that the assessee failed to produce documentary /AY.2016-17 J. B. & Brothers Pvt. Ltd. evidences during assessment proceedings from which it can be establish the nexus that own capital of the company has been used in the exempt income investments.
2. On the facts and in the circumstances of the case and in law the Id. CIT(A) has erred in restricting the addition to Rs.19,20,000/- as against addition of Rs.48,00,000/- made by the assessing officer u/s 40A(2)(b) of the I.T, Act observing that the persons have been associated with the Company since its inception and have been paid the salaries for rendering the services despite the fact that the assessee failed to prove as to how the alleged four employee being relatives of the Director, qualify to draw such a huge salary without any special skillset and poor educational qualification.
3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A)-4, Surat ought to have upheld the order of the Assessing Officer.
4. It is, therefore, prayed that the order of the Ld. CIT (A) may be set aside and that the assessing officer may be restored to the above extent.
The assessee craves to add, amend, alter, substitute, modify the above ground of appeal
, raise any new ground of appeal, if necessary, either before or during the course of the hearing of the appeal on the basis of submissions to be made.”
3. At the outset, Learned Counsel for the assessee, argued that ground no.1 raised by the Revenue is squarely covered in assessee’s own case, by the order of the Tribunal, in & 103/SRT/2017, for AYs. 2013-14 & 2014-15, order dated 12.07.2019 wherein it was held as follows: “9. Ground No.4 relates to disallowance u/s.14A of the Act.
10. In the assessment order the Assessing Officer had noted that the assessee has claimed interest expenses of Rs.7,99,24,820/- which includes general interest of Rs.1,68,53,718/- remaining interest / bank interest considered as directly related to the export / import. The Assessing Officer has further noted that the assessee did not make any disallowance u/s.14A of the Act. The Assessing Officer has asked the assessee why disallowance u/s.14A is not made as company own capital reserves more than investments given rise to exempted income. The assessee has not filed any details before the Assessing Officer. Therefore, the Assessing Officer by invoking section 14A r.w.Rule 8D of the IT Rules had disallowed the amount of Rs.5,01,943/-. The working of the above disallowance given by the Assessing Officer as under: II A Financial Expenses 1,68,53,718/- B Average value of investment, 8,05,65,885/- 2
/AY.2016-17 J. B. & Brothers Pvt. Ltd. income from which does not form part of total income, as appearing in the balance sheet of the Assessee, on the first day and last day of the previous year. C Average of total assets as 13,69,98,49,110/- appearing in the balance sheet of the Assessee, on the first day and the last day of the previous year. A x B 1,68,53,718 x 8,058,65,88= C 99,113/- 13,69,98,49,110 III Amount equal to half percent of the average value of investment, income from which does not form part of total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year TOTAL 5,01,943/- 11. On appeal, the ld.CIT(A) gave a finding that the assessee is having a share capital + reserves of 436 crores as on 31.03.2013 as against investment in shares / securities generating exempt income was only 8.05 crores. The ld.CIT(A) further gave a finding that the assessee is having a owned funds to the tune of 436 crores. Therefore, it has to be presumed that own funds are used for making investment yielding to exempt income. Further, above proposition he has relied on the jurisdictional High Court in the case of CIT vs. Torrent Power Ltd., [2014] 363 ITR 474 (Guj) and also CIT vs. Hitachi Home & Life Solutions (I) Ltd., [2014] 221 taxman 109 (Guj) directed the Assessing Officer to deleted the addition. We find from the order that the ld.CIT(A) that the assessee is having a owned funds to the extent of 436 crores as on 31.03.2013 investments made by the assessee to generate the exempt income only to the extent of 8.05 crores. Therefore, the ld.CIT(A) reasonable presumed that assessee has invested only own funds no borrowed funds. By considering the facts and circumstances of the case, we find that there is no error passed in the order passed by ld.CIT(A), therefore ground raised by the Revenue is dismissed.
12. Ground No.5 in the assessment order, the Assessing Officer noted that the commission amount of Rs.12,52,434/- was in respect of turnover of earlier years and therefore the same was to be disallowed. The assessee has explained before the Assessing Officer that the commission expenditure accounted for as and when debit note is raised by the broker. 3 /AY.2016-17 J. B. & Brothers Pvt. Ltd. The Assessing Officer has not satisfied by the explanation given by the assessee and therefore he has disallowed the entire amount of Rs.12,52,434/-.
13. On appeal, the ld.CIT(A) deleted the addition made by the Assessing Officer on the ground that the assessee has incurred the expenses, the Assessing Officer has not doubted the genuineness of the expenditure. This expenditure has to be allowed either current year or previous year.
On appeal, the ld.Departmental Representative (DR) strongly supported the orders passed by the Assessing Officer and also submitted that the genuineness of the expenditure is not the issue and submitted that the expenditure incurred by the assessee relates to earlier year not current year.
On the other hand, the ld. Counsel for the assessee strongly supported the order passed by the ld.CIT(A).
16. We have heard both the parties and gone through the records and gone through the orders of the authorities below. The case of the assessee is that the assessee has paid brokerage to the extent of Rs.12,52,434/- and submitted before the Assessing Officer that as and when debit note is raised by the broker, these expenses will be paid. This expenditure filed by the assessee has not explained by the Assessing Officer for the reason that when the expenses approved at the time the company has to make a provision for expenses or debit the same in the books of accounts. However, the same was not done by the assessee, therefore entire incurred by the assessee was disallowed and added back to the total income of the assessee.
On appeal, the ld.CIT(A) gave a finding that the expenses incurred by the Assessing Officer is not doubted by the Assessing Officer and only case of the Assessing Officer is that these expenses relates to earlier years not related to current year. We find that the ld.CIT(A) after considering the detailed explanation given by the assessee and also observations made by the Assessing Officer gave a find that these expenses are genuine and has to allowed even in current year also. We find no reason to interfere with the order passed by the ld.CIT(A), therefore this ground raised
by the Revenue is dismissed.”
4. As the issue is squarely covered in favour of the assessee, by the decision of the Coordinate Bench, in assessee`s own case and there is no change in facts and law and the Revenue is unable to produce any material to controvert the aforesaid findings of the Coordinate Bench (supra). We find no reason to interfere in the above
/AY.2016-17 J. B. & Brothers Pvt. Ltd. said order of Co-ordinate Bench, therefore respectfully following the binding judgment of Co-ordinate Bench in the assessee’s own case, we dismiss ground No.1 raised by the Revenue.
5. Ground No.2 raised by the revenue, relates to confirmation of addition made by ld. CIT(A) to the tune of Rs.19,20,000/-.
Brief facts qua the issue are that the ground No.2 raised by the Revenue is relating to disallowance of salary expenses u/s 40A(2)(b) of the Act, in respect of four (4) relatives of the Directors of Rs.48,00,000/- (Rs.12,00,000/- x 4). According to the assessing officer, the 4 lady members who have been given the salaries are the shareholders of the assessee-company and the assessee has paid the salaries to these 4 lady members to avoid payment of Dividend Distribution Tax. The second argument of the Assessing Officer was that no evidence was furnished that the said lady members attended office and rendered their services. The Assessing Officer did not accept the contention of the assessee that the salaries to these lady members were regularly paid by cheques and TDS was deducted from the salaries regularly and all the lady members were in higher tax bracket and hence, there was no loss to the Revenue. Accordingly, the Assessing Officer disallowed Rs.48,00,000/- fully being the total salary paid to the said 4 lady members.
Aggrieved by the order of Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A) who has partly allowed the appeal of the assessee observing as follows:
“8.2 I have gone through the assessment order and the submissions made by the AR of the assessee. The basic contention of the assessing officer is that all the lady members are just matriculates and do not have any prior experience of rendering services. The AR of the assessee submits that all 5 /AY.2016-17 J. B. & Brothers Pvt. Ltd. these lady members have been associated with the company for several years when the company was earlier a partnership firm in which all the 4 lady members were the partners. Even after conversion of the partnership firm into Private Limited company, they continued to discharge their duties at Mumbai and Surat in their respective offices. It was submitted that in the business of diamond, as the commodity dealt is of very high value, the trusted people from the family are required to be stationed at crucial points to avoid any pilferage or misappropriation etc. It was also submitted that all the 4 lady members were being paid the salary since AY 2011-12 and only the amount of salary paid has increased over the years. In the preceding AY, all the 4 lady members were paid salary of Rs.6,00,000/- per annum per person, which has increased to Rs. 12,00,000/- during the impugned AY. In AY 2013-14 and earlier AYs, the salary of these employees was in the range of Rs.1,77,500/- to Rs.2,40,000/- per employee per annum has been allowed, 8.3 Considering the fact that all the lady members have been associated with the assessee company since its inception (even when it was a partnership firm,) and have been paid the salaries for rendering the services, the entire salary paid to them cannot be disallowed as done by the assessing officer, From AY 2011-12 to AY 2015-16, these lady members have been paid a salary initially they were paid in the range of Rs.1.78 lacs to Rs.2.04 lacs each. Subsequently, in AY 2013-14, the salary was increased in the range of Rs.2.40 lacs to Rs.3.08 lacs each and from, AY 2014-15, it: was further increased to Rs.6,00,000/- each per annum. The increase of 100% in the impugned AY is not as per the general trend of increasing the salaries of the employees, Considering the fact that: they were getting the salary of Rs.6,00,000/-each per annum, for last 2 years, an increment of 20% of the salary would be the justifiable increase as per the normal trend in the several other companies. Accordingly, a salary of Rs.7,20,000/- per lady employee is directed to be allowed being paid wholly and exclusively for the purposes of the business of the assessee. Accordingly, out of Rs.48,00,000/- disallowed by the assessing officer, the addition of Rs.19,20,000/- (Rs.4,80,000/- [x] 4) u/s 40A(2)(b) of the Act is sustained. The assessee gets relief of Rs.28,80,000/- . Ground No.3 is partly allowed.”
Aggrieved by the order of ld. CIT(A), the Revenue is in further appeal before us.
The Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity.
Learned Counsel for the assessee argued that Assessing Officer made addition merely on the issue that assessee has paid the salary to 6 /AY.2016-17 J. B. & Brothers Pvt. Ltd. related parties, however, the persons to whom the salary were paid, are not the related party/person, therefore no addition should be made u/s 40A(2)(b) of the Act.
We have heard both the parties and carefully gone through the submissions put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the facts of the case including the findings of the ld. CIT(A) and other material brought on record. We note that Assessing Officer mainly disallowed the salary on the reason that these four persons do not have substantial educational qualification. The Assessing Officer has also observed that these persons do not have special skill related to diamond, except the long association with assessee-company. In this connection, we note that assessee is in the business of manufacturing of polished diamond out of rough diamonds and for that skill is acquired by virtue of experience only. Thus, Assessing Officer put more emphasis only on education, however, we note that education is different than the experience. In most of the Industries, a person is paid higher salary by virtue of his experience in that Industry. Besides, we note that the payment of salary was made by assessee month-to-month basis and subject to TDS deduction. The salary is paid by cheque.
We also note that the employees to whom the salaries are being paid are taxed in the higher bracket of 30 % tax rate hence there is no motive to reduce the tax of the company by paying the said salaries. We note that diamond business is a peculiar nature of business and for that confidential and reliable persons are very much required, therefore, assessee would decide that who is reliable persons for his business and how much salary is to be paid. The Assessing Officer 7
/AY.2016-17 J. B. & Brothers Pvt. Ltd. cannot sit on the arm chair of the assessee-company`s Board of Directors and decide that who is reliable persons and how much salary is to be paid for the loyalty. Hence, we note that payment of salary by assessee does not exceed the fair market value prevailing in the market. Therefore, considering these factors, we note that the payment of salary is fully justified, and addition sustained by ld CIT(A) to the tune of Rs.19,20,000/- is reasonable. Ground No.2 raised by the Revenue is dismissed.
Ground Nos. 3 to 5 raised by the Revenue are general in nature, hence do not require adjudication.
In the result, appeal filed by the Revenue is dismissed.
Order is pronounced on 26/10/2023 in the open court.