SHRI PANKAJ ARORA, SRINAGAR V. INCOME TAX OFFICER WARD--3 (2), SRINAGAR

ITA 112/ASR/2020

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 0972 (ITAT-AMRITSAR)
• Duration Of Justice: 2 year(s) 6 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-10-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 25-09-2022
• Assessment Year: 2016-2017
• Appeal Filed On: 22-03-2020
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Business expenditure; Opportunity of being heard; CHAPTER IV
• Section: 143(1); 48

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH, AMRITSAR (VIRTUAL COURT) BEFORE DR. M. L. MEENA, ACCOUNTANT MEMBER AND SH. ANIKESH BANERJEE, JUDICIAL MEMBER I.T.A. Nos. 48 & 112/Asr/2020 Assessment Years: 2016-17 Sh. Pankaj Arora C/o Pankaj Trading Co., LD. Road, Hazuri Bagh, Srinagar [PAN: ABKPA 1588J] Vs. Income Tax Officer, Ward 3(2), Srinagar (Appellant) (Respondent) Appellant by : None Respondent by: Ms. Amanpreet Kaur, Sr. DR Date of Hearing: 26.09.2022 Date of Pronouncement: 13.10.2022 ORDER Per Dr. M. L. Meena, AM: Both the appeals have been filed by the assessee against the order dated 09.08.2019 passed by the Ld. Commissioner of Income Tax (Appeals), Jammu, in respect of the Assessment Year 2016-17. ITA Nos. 48 & 112/Asr/2020 Pankaj Arora v. ITO 2 2. The assessee has raised the following common grounds of appeal: “1. The order of the assessing officer is erroneous on the facts and in the law. On the facts and in the circumstances of the case he ought to have accepted the returned income. 2. The learned Assessing officer is not justified on taking a recourse to the provisions of section 40A2(b) of the income tax Act by disallowing salary of one of the employee only because he is a relative of the appellant .The AO has claimed that there has been sharp decrease in the Net profit of the business concern vis a vis previous year but as allowed accepted all the expenses due which there has been sharp decrease in the net profit. AO has accepted the Online Expenses and Rental expenses claimed in the P and L Account although there was an increase of 147 % and 300 % in these expenses vis-a vis previous year but has disallowed the increased salary expenses merely because salary was also paid to Mayank Arora which is also the son of the appellant. The overall increase in the salary Expense is 54% (appox) (not 154% as mentioned in the order of the AO). Salary of all the staff members were increased during the year not only of Mayank Arora. The overall increase in the salary is 54% in which 39.15% was increased in the salary of other employees and 66.67% was increased in the Salary of Mr. Mayank Arora .The AO is not justified in adding back an amount of Rs 456,000/ on account of Salary of Mayank Arora because the AO is has not drawn an comparison as to the fair market value of the qualified persons with a degree of BCA and MBA and with regard to the increase in the turnover of the concern. The AO is not justified to compare the salary of a peon or a salesman with a highly qualified person handling all the important business matters of the concern. Merely because the employee is son of the appellant his salary cannot be became unjustified while all other increase in expenses is justified. The AO while making the disallowance observed that disallowance was made keeping in view sharp decrease in the profit of the business. But how quantum or nature of business affected payment of salary of its son, has not been elaborated. No businessman can be compelled to maximize his profit. The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. There is nothing to suggest that the AO ever brought any material on record on this aspect before concluding that ITA Nos. 48 & 112/Asr/2020 Pankaj Arora v. ITO 3 remuneration @ 50000 pm was excessive or unreasonable nor even cited any comparable instances in respect of the fair market value of the services rendered by the employee. 3. The appellant craves leave to add, amend, alter, vary and / or withdraw any or all of the grounds of Appeal during the hearing of the case.” 3. The appellant assessee has filed two appeals in respect of same assessment year 2016 – 17. The first appeal was filed late by 48 days and the second appeal was filed by 83 days on the common grounds of appeal in respect of the same assessment year, and therefore the first appeal get merged with the second appeal and accordingly adjudicated after condoning the short delay of 83 days by admitting the appeal on merits with the consent of additional CIT DR in the interest of justice. 4. During the course of assessment proceedings, the learned Assessing invoked the provisions of section 40A2(b) of the income tax Act for disallowing salary of one of the employee who was a relative of the appellant . The AO has accepted the Online Expenses and Rental expenses claimed in the P and L Account with an increase of 147 % and 300 % expenses vis-a vis previous year expenses but has disallowed the increased salary expenses merely because salary was paid to Mayank Arora who was son of the appellant. The overall increase in the salary Expense is 54% appox as against 154% mentioned by the AO. The ITA Nos. 48 & 112/Asr/2020 Pankaj Arora v. ITO 4 assessee explained that Salary of all the staff members were increased during the year not only of Mayank Arora. The overall increase in the salary is 54% in which 39.15% was increased in the salary of other employees and 66.67% was increased in the Salary of Mr. Mayank Arora .The AO being not satisfied with the explanation of the assesse, added back an amount of Rs 456,000/ on account of Salary of Mayank Arora without substantiating or comparing the value of the qualified persons with a degree of BCA and MBA with regard to the increase in the turnover of the concern. 5. In appeal, the learned CIT appeal while granting part relief has observed as under: “3.1. I have considered the facts of the case and the written submissions filed by the Authorized Representative of the appellant. The appellant has filed written submissions which are mainly a compilation of case laws of different judicial authorities without properly presenting the facts of the present case. I fail to understand how salary of Rs.50,000/- is justified when huge commission of Rs.32,95,945/- was claimed and allowed for sale of Rs.1,48,22,801/- as mentioned in the assessment order. To claim higher salary, the appellant could have justified nature of work done by his son. In none of the shops such salaries are witnessed as claimed by the appellant. However, taking a practical view, salary of Rs.15,000/- P.M. is allowed in place of rs.12,000/- P.M. allowed by the A.O. The appellant shall get part relief.” 6. The appellant assessee objected to the addition made by the AO contending that its return of income has been processed u/s 143(1) accepting the returned income. Subsequently the case was selected for ITA Nos. 48 & 112/Asr/2020 Pankaj Arora v. ITO 5 limited scrutiny under CAAS on the issue whether deduction claimed on account of business expenses is admissible and that without disproving the expenses claimed on account of salary paid by way of substantiating with the corroborative documentary evidences, the disallowances made on account of salary paid is unjustified. He filed written synopsis which reads as under: “The appellant is an individual carrying on the business as a trader of merchandise through online portals and on the counter also under the name and style of Disney collection. The appellant has been carrying on this business for so many years as a retailer but has started selling through online portals since FY 2013-14 with the help of his son as he is being familiar with the information technology required in this line of business. Mayank Arora joined the business of his father on full time employment during the year 2014-15 on a salary of Rs 30000/month and upon his joining the employment the sale of the business has reached upto Rs 11494391 from a mere Rs 4005851 during the immediately preceding year, and Rs 14822801 during the year 2015-16 AY 2016-17.it was all because of his know how of the technology and use of his educational skills that there was such a jump in sale of the business. The appellant has maintained books of accounts during the normal course of his business and the same were duly audited under the income tax Act 1961 and the return of income was filed along with the Tax Audit report .The appellant filed his return of income with the business income of Rs 217238 and along with income from the firm in which the appellant is a partner and also income from other sources. The return of income has been processed u/s 143(1) accepting the returned income .Subsequently the case was selected for limited scrutiny under CAAS. on the issue whether deduction claimed on account of business expenses is admissible .The assessment has been completed determining the total income at Rs.7,17,300/- against the retuned income of Rs.2,61,300/-, after deduction under chapter IV of income tax Act 1961 While doing so the assessing officer has made the following additions/disallowances. (1)Rs 4,56,000/- on account of by disallowing the salary of Rs 4,56,000 paid to employee of the appellant which happens to be his son on the plea that the ITA Nos. 48 & 112/Asr/2020 Pankaj Arora v. ITO 6 salary is unjustified and huge as there has been sharp decrease in the net profit of the business . During the course of assessment proceedings it was explained to the Assessing Officer that the salary paid to Mayank Arora is duly justified keeping in view his role in the business establishment of the appellant and the show cause notice issued was not clear what inference AO want to draw from knowing the credentials and responsibilities of Mayank Arora in the business of the appellant and AO did not also mentioned the recourse to which provision of IT Act he going to take, and no opportunity of being heard was provided to the appellant before passing the order to discuss upon the conclusion drawn by AO thus depriving appellant of an opportunity of being heard which is against the principal of natural justice It is against this order of assessment this appeal is being preferred with a request to delete the addition made and allow the expenditure as claimed.” 7. Per contra, the learned DR stands by the impugned order. 8. Having heard the learned additional CIT DR, perusal of the records and the impugned order, it is noted that the AO has made disallowance, in view of sharp decrease in the profit of the business. But how quantum or nature of business affected payment of salary of its son, has not been elaborated. It is settled principle of law that no businessman can be compelled to maximize his profit. The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. There is nothing to suggest that the AO or the learned CIT appeal, ever brought any material ITA Nos. 48 & 112/Asr/2020 Pankaj Arora v. ITO 7 on record on this aspect before concluding that remuneration @ 50000 pm (or 12,000 month as estimated by learned CIT appeal) was excessive or unreasonable nor even cited any comparable instances in respect of the fair market value of the services rendered by the employee with professional qualifications. Merely because the employee is son of the appellant, disallowance of payment of salary cannot be unjustified in view the professional qualifications and the business requirement given, in proportionate to increase in salary paid to unqualified employees of the assesse in the absence of material evidence on record to disprove the claim of the appellant assessee. 9. In the above view, and considering the peculiar facts of the case, we accept the grievance of the assessee as justified and accordingly, the addition made on account of salary restricted to Rs. 12,000 per month by learned CIT (Appeal) is deleted. Order pronounced in the open court on 13.10.2022 Sd/- Sd/- (Anikesh Banerjee) (Dr. M. L. Meena) Judicial Member Accountant Member *GP/Sr/PS* ITA Nos. 48 & 112/Asr/2020 Pankaj Arora v. ITO 8 Copy of the order forwarded to: (1) The Appellant: (2) The Respondent: (3) The CIT(Appeals) (4) The CIT concerned (5) The Sr. DR, I.T.A.T True Copy By Order