DCIT 10(2), MUMBAI vs. AARVI ENCON P.LTD, MUMBAI

आयकर आयकर आयकर अपीलीय आयकर अपीलीय अपीलीय अिधकरण अपीलीय अिधकरण अिधकरण, अिधकरण " ए” खंडपीठ खंडपीठ खंडपीठ मुंबई खंडपीठ मुंबई मुंबई मुंबई INCOME TAX APPELLATE TRIBUNAL,MUMBAI-“A”,BENCH सव"ी जोिग"दर"सह , "याियक सद"य एवं एवं एवं राजे"", लेखा सद"य एवं Before S/Sh. Joginder Singh,Judicial Member & Rajendra,Accountant Member आयकर आयकर अपील अपील संसंसंसं/.ITA No.5347/Mum/2013,िनधा"रण िनधा"रण वष" वष"/Assessment Year-2010-11 आयकर आयकर अपील अपील िनधा"रण िनधा"रण वष" वष" Dy. CIT-10-(2) Vs. M/s. Aarvi Encon Pvt. Ltd. Room No.432, 4th Floor, Unit No.155, 1st Floor Aayakar Bhavan, M.K. Road Shah & Nahar Indl. Estate(A 1) Mumbai-400 020. Dhanraj Mill Compound Sitaram Jadhav Marg,Lower Parel Mumbai-400 013. PAN:AAACA 3640 H (अपीलाथ" /Appellant) (""यथ" / Respondent) CO No.235/Mum/2014,िनधा"रण िनधा"रण िनधा"रण वष" िनधा"रण वष" वष"/Assessment Year-2010-11 वष" आयकर आयकर अपील अपील संसंसंसंArising out of /ITA/5347/Mum/2013,िनधा"रण िनधा"रण वष" वष"/Assessment Year :2010-11 आयकर आयकर अपील अपील िनधा"रण िनधा"रण वष" वष" M/s. Aarvi Encon Pvt. Ltd. Dy. CIT-10-(2) Mumbai-400 020. Mumbai-400 013. Vs. (अपीलाथ" /Assessee ) (""यथ" / Respondent) िनधा"रती िनधा"रती ओर ओर सेसेसेसे/Assessee by :Dr. K. Shivaram िनधा"रती िनधा"रती ओर ओर राज"व क" ओर से/ Revenue by :Shri Mohammed Rizwan सुनवाई सुनवाई क" क" तारीख तारीख / Date of Hearing : 01-12- 2015 सुनवाई सुनवाई क" क" तारीख तारीख घोषणा क" तारीख / Date of Pronouncement : 01.01.2016 आयकर आयकर आयकर अिधिनयम आयकर अिधिनयम अिधिनयम,1961 क" अिधिनयम क" क" धारा क" धारा धारा 254(1)केकेकेके अ"तग"त धारा अ"तग"त अ"तग"त आदेश अ"तग"त आदेश आदेश आदेश Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद"य राजे"" के अनुसार PER RAJENDRA, AM- लेखा सद"य राजे"" के अनुसार लेखा सद"य राजे"" के अनुसार लेखा सद"य राजे"" के अनुसार Challenging the order dt.10.05.13 of CIT(A)-21,Mumbai,the Assessing Officer(AO) has filed the present appeal and the Assessee has filed Cross-Objection (CO). Assessee-company,engaged in the business of engineering consultancy and providing of manpower,filed its return of income on 02.10.2010declaring income at Rs.5.88Crores.The AOcompleted the assessment on27.02.2013,u/s.143(3) of the Act determining the income of the assessee at Rs.6.10 Crores. ITA No.5347/Mum/2013: 2.Effective ground of appeal is about deleting the addition of Rs.1.21 Crores.During the assessment proceedings,the AO found that the assessee had paid commission, amounting to Rs.2.42 Crores to two of its directors namely V D Sanghvi(VDS) and Jaidev Sanghavi (JS). Comparing the data of sales and commission payment for the AY.s.2007-08 to 2010-11,he held that in the AY.2008-09 turnover had increased by 83.68%,that the assessee had paid commission of 1% to its directors,that in the AY.s.2009-10 and 2010-11 the turnover increased @ 32.65% and 22% respectively,that the directors were paid commission @ 2%and 4% respectively for those AY.s.As he was of the opinion that the commission paid during the year under appeal was very high as compared to the increase in sales,so,he asked the assessee as to why the commission paid to the directors should not be restricted to 2% only.After considering the submissions of the assessee,the AO held that commission paid during the year was very high as compared to the increase in turnover,that commission was paid as an 5347/13-AarviEncon-10-11

incentive for extra efforts put by the employees,that there was increase of 22% in the sale,that the commission was doubled for the year under consideration, that there was no reasonable cause,logic to pay such a huge amount of commission,that it was siphoning off funds from the company in the name of commission,that the Board resolution could not be taken as an evidence of extra service,that the assessee had failed to justify the payment of commission, that the directors had not put extra services,that the commission payment was to be disallowed u/s. 40A(2b)of the Act. The AO also referred to the provisions of section 36(1)(ii) of the Act and held that higher commission was paid to avoid declaration of dividend,that three of the directors were family members,that it was a device to avoid payment of taxes.Finally,he restricted the commission payment to 2% and made a disallowance of Rs.1.21,39,377/-u/s.40A(2)(b)/36(1)(ii)of the Act. 3.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority(FAA).Before him it was argued that as per Board Resolution dated 20. 04.2007 commission was to paid to the two of the directors at fixed rate once the turnover was to exceed the limit fixed as per resolution,that the resolution did not mention that commission payment was to be proportionate to incremental sale,that the directors had appeared before the AO during the assessment proceedings and explained and justified the services rendered by them in relation to comparative payment made by several listed companies,that the directors were well qualified,that they were associated with the company since 1987/ 2005,that the payment was made out of commercial expediency,that there was substantial increase in gross and net profit of the company during the year,that the provisions of section 40A(2)(b)were wrongly invoked,that the company and the directors were in the same tax brackets,necessity of expenditure was no longer a valid test u/s.40A(2)(b),that the AO had ignored the cases supporting the contention of the assessee,that provisions of section 36(1)(ii) were not applicable,that in the earlier years said section was not invoked though the assessments were made u/s.143(3)of the Act. After considering the submissions of the assessee,the FAA held that the assessee-company was an engineering consultancy company,that based on Board resolution of it would pay commission to the directors,that commission was fixed at 2% for the turnover of Rs.50.00 crores,that during the year under appeal the assessee had turnover of Rs.60.69 crores,that commission payment @2% of the turnover was not excessive,that reasonableness of expenditure is to be judged from the point of view of businessman.She referred to the judgment of Hive Communication of Hon’ble Delhi High Court.The FAA compared the figures of commission paid if the assessee were a partnership firm.She further held that the directors and the company were assessed at the same tax rates,that it was not a case of tax evasion.Referring to the judgments of Dempo & Co.(P.)Ltd.(196taxmann193)and Indo Saudi Services(Travel)(P.)Ltd.(310ITR306),she held that the AO had not brought on record any comparative material to show that the assessee had paid commission to the directors that was excessive or unreasonable as per the comparative cases, that payment of commission based on turnover was reasonable.Finally,the appeal filed by the assessee was allowed. 4.Before us,the the Departmental Representative(DR)supported the order of the AO and stated that there was no justification for paying huge commission to the directors.The Authorised Representative(AR) stated that the commission was paid in pursuance of the Board Resolution,that same was linked with performance, that commission was neither excessive nor unreasonable, that commission paid pursuant to the resolution was accepted by the AO in earlier years while passing the order u/s. 143(3), that both the directors were highly qualified and experienced,that no commission was paid to non working directors.He referred

5347/13-AarviEncon-10-11

to the page no.53, 60 and 62 of the paper book.He relied upon the cases of Jagdamba Roller Floor Mills Ltd.(117ITD260),Voltamp Transformers P.Ltd.(129ITR105),Abbas Wazir Pvt. Ltd.(265ITR77). 5.We have heard the rival submissions and perused the material before us. We find that the commission was paid pursuant to the resolution of the Board of Directors,that commission paid to directors as per the resolution was accepted by the AO while framing assessment for the earlier years,that commission paid was less than what was permissible as a deduction for a partnership firm,that commission was not paid to non working director,that there was increase in turnover from Rs.49.00crores(app.)to Rs.60.00 crores(app.)in the case of the company for the year under appeal,that reasonableness of expenditure was to be decided from the point of view of the businessman and not of the AO. In the cases of Shehzad A. Nand & Sons (108ITR358) and Consulting Engineering Group Ltd.(365ITR284),it has been held that quantum OF Commission to be paid is to be determined by the assessee and not by the AO. One of the established principles of taxation jurisprudence holds that reasonableness of an expenditure has to be judged from the angle of a businessman.We further find that in the case of Indo Saudi Services(Travel)(P.)Ltd., the Hon’ble Bombay High Court has held that under Board Circular No. 6-P, dated July, 1968, no disallowance could be made under section 40A(2) in respect of payment made to the relatives and sister concern where there was no attempt to evade tax.We find that the AO has failed to establish that there was attempt to evade tax by the assessee company.Considering the above mentioned peculiar facts and circumstances of the case, we are of the opinion that the order of the FAA does not suffer from any legal or factual infirmity.Therfore, confirming his order we decide the effective ground of appeal against the AO. CO/235/Mum/2014: In its CO the assessee has supported the order of the FAA.While deciding the appeal filed by the AO we have upheld the order of the FAA deleting the addition, therefore, the CO becomes infructuous and stands dismissed. As a result, appeal filed by the AO and the C.O. of the assessee stands dismissed. फलतः िनधा"रती अिधकारी "ारा दािखल क" गई अपील एवं िनधा"रती "ारा दािखल क" गई ""या"ेप नामंजूर क" जाती है. Order pronounced in the open court on 1st January, 2016. आदेश क" घोषणा खुले )यायालय म* +दनांक 01 जनवरी, 2016 को क" गई । (जोिग"दर"सह/ Joginder Singh) (राजे"" / RAJENDRA) "याियक सद"य / JUDICIAL MEMBER लेखा लेखा लेखा सद"य लेखा सद"य सद"य / ACCOUNTANT MEMBER सद"य मुंबई/Mumbai,"दनांक/Date 01.01.2016 व.िन.स.Jv.Sr.PS. 3

5347/13-AarviEncon-10-11

आदेश क" क" "ितिलिप "ितिलिप अ"ेिषत अ"ेिषत/Copy of the Order forwarded to : आदेश आदेश आदेश क" क" "ितिलिप "ितिलिप अ"ेिषत अ"ेिषत 1.Appellant /अपीलाथ"