Pfeiffer Vacuum Technology India (P) Ltd., Hyd, Hyderabad V. DCIT, Circle-16(3), Hyderabad, Hyderabad

ITA 1243/HYD/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6249 (ITAT-HYDERABAD)
• Duration Of Justice: 10 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 07-09-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 30-10-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A SITARAMA RAO
• Section: 143(3); 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 1243/HYD/2015 ASSESSMENT YEAR: 2011-12 M/S PFEIFFER VACUUM INDIA (P) LTD., HYDERABAD. (MERGED WITH PFEIFFER VACUUM INDIA (P) LTD.,) PAN AARCP 4282B VS. DY. COMMISSIONER OF INCOME- TAX, CIRCLE 16(3), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI P.S.R.V.V SURYA RAO REVENUE BY : SHRI A. SITARAMA RAO DATE OF HEARING 07-09-2016 DATE OF PRONOUNCEMENT 21-09-2016 O R D E R PER S. RIFAUR RAHMAN, A.M.: THIS APPEAL IS PREFERRED BY THE ASSESSEE AGAINST T HE ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX(A) - 4, HYDE RABAD FOR AY 2011-12. 2. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSES SEE COMPANY IS ENGAGED IN THE BUSINESS OF SALE AND SERVICE OF VACU UM PUMPS AND SPARE PARTS, FILED ITS RETURN OF INCOME FOR THE AY 2011-12 ON 30/11/2012 DECLARING A TOTAL INCOME OF RS. 41,59,38 1/- UNDER THE NORMAL PROVISIONS AND BOOK PROFITS U/S 115JB ARE AD MITTED AT RS. 48,72,592/-. THE CASE WAS SELECTED FOR SCRUTINY UND ER CASS. THE AO COMPLETED THE ASSESSMENT U/S 143(3) BY MAKING ADDIT ION OF RS. 40,25,000/- TOWARDS SETTLEMENT PAYMENTS AND ASSESSE D THE INCOME AT RS. 81,84,381/-. 2 ITA NO. 1243/H/15 PFEIFFER VACUUM TECHNOLOGY INDIA (P) LTD. 2.1 THE TOTAL INCOME INCLUDED A CLAIM OF RS. 40,25, 000/- PAID AS 'COMPENSATION/SETTLEMENT PAYMENT' BY THE ASSESSEE T O ITS ERST-WHILE MANAGING DIRECTOR BASED ON HIS TERMS OF APPOINTMENT AND SETTLEMENT AGREEMENT ACCOUNTED AND CLAIMED AS SALARY. HIS SERV ICES WERE TERMINATED DURING THE CURRENT FINANCIAL YEAR. THE T ERMINATION AND PAYMENT WAS A RESULT OF MERGER OF THE APPELLANT COM PANY INTO PFEIFFER VACUUM INDIA PVT. LTD. 2.2 IT PAID RS. 12,47,814/- AS TAX UNDER REGULAR PR OVISIONS BEING HIGHER THAN TAX PAYABLE U/S 115JB. AN AMOUNT OF RS. 22,26,989/- WAS PAID BY WAY OF ADVANCE TAX AND AN AMOUNT OF RS. 3,1 4,446/- WAS CLAIMED AS CREDIT ON ACCOUNT OF TDS RESULTING IN A REFUND CLAIM OF RS. 12,56,187/-. 2.3 HOWEVER WHILE FILING ITS RETURN OF INCOME, THE APPELLANT COMPANY INADVERTENTLY OMITTED TO CLAIM SET OFF LOSS ES OF RS. 6,66,770/- RELATING TO A. Y. 2010-11. THE RETURN FO R THAT YEAR WAS FILED ON 14-10-2010, THE EXTENDED DUE DATE BEING 15-10-20 10. IT CLAIMED A REFUND OF RS. 37,753/- FOR THAT YEAR. THE SET OFF W AS ALSO OMITTED TO BE CLAIMED EVEN DURING THE ASSESSMENT PROCEEDINGS. 2.4 WHILE COMPLETING THE ASSESSMENT THE ASSESSING O FFICER EXAMINED ALL THE INFORMATION AND DOCUMENTS FILED AN D EXPLANATIONS OFFERED. SHE NARROWED DOWN TO THE PAYMENT OF ABOVE REFERRED COMPENSATION/SETTLEMENT AMOUNT OF RS. 40,25,000/- M ADE TO THE ERSTWHILE MD AND MADE AN ADDITION OF THAT AMOUNT. S HE MADE THE DISALLOWANCE BY HOLDING THE PAYMENT AS FOR NON-COMP ETITION AND BEING IN CAPITAL IN NATURE. SHE DID NOT ACCEPT THE EXPLANATION OFFERED BY THE APPELLANT COMPANY. 3. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE P REFERRED AN APPEAL BEFORE THE CIT(A). 4. THE CIT(A) CONFIRMED THE ADDITION MADE BY THE AO BY OBSERVING AS UNDER: 3 ITA NO. 1243/H/15 PFEIFFER VACUUM TECHNOLOGY INDIA (P) LTD. 3. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CAS E, ADDITIONS MADE IN THE ASSESSMENT ORDER AND THE SUBMISSIONS OF THE APPELLANT. IN THIS REGARD, THE ASSESSING OFFICER HA S MAINLY DISALLOWED THE COMPENSATION PAID TO THE DIRECTOR TR EATING IT AS CAPITAL IN NATURE, EVEN THOUGH THE TDS WAS DEDUCTED . THE APPELLANT EXPLAINED THAT AS PER SECTION 17 OF THE A CT, IT IS TO BE TREATED AS PROFIT IN LIEU OF SALARY IN THE HANDS OF THE MANAGING DIRECTOR. HOWEVER, THE APPELLANT FAILED TO PRODUCE A COPY OF THE RETURN OF INCOME FILED BY THE MANAGING DIRECTOR AS PER WHICH HE HAS DISCLOSED THIS AMOUNT AS HIS INCOME. THEREFORE, I AGREE WITH THE ASSESSING OFFICER AND THE ADDITION MADE BY THE ASSESSING OFFICER IS CONFIRMED AND THE APPEAL IS DISMISSED. 5. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE I S IN APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS OF APPEAL: 01. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEAL S) HAS ERRED IN LAW AND ON FACTS AND CIRCUMSTANCES OF THE CASE IN CONFIRMING THE DISALLOWANCE OF THE EXPENDITURE CLAI MED AND THE ADDITION MADE TO TOTAL INCOME. 02. THE LEARNED CIT(A) ERRED IN NOT PASSING A SPEAK ING ORDER IN DISPOSING OFF THE GROUNDS OF APPEAL AND IN COMPREHE NDING THE NATURE OF PAYMENT MADE TO THE ERSTWHILE MANAGING DI RECTOR OF THE COMPANY AS COMPENSATION/SETTLEMENT PAYMENT AND HOLDING IT AS NON-COMPETE FEES AND IN TREATING IT AS CAPITAL N NATURE. SHE OUGHT TO HAVE APPRECIATED THAT THE PAYMENT IS NOTHI NG BUT SALARY N TERMS OF SEC.17, CLAUSE 3. 03. THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISA LLOWANCE MADE ON THE GROUND THAT THE ASSESSEE FAILED TO PROD UCE A COPY THE RETURN OF INCOME FILLED BY THE ERSTWHILE MANAGI NG DIRECTOR OF THE APPELLANT COMPANY. 04. THE LEARNED CIT(A) ERRED IN NOT BRINGING ON REC ORD THE SUBMISSIONS MADE IN SUPPORT OF THE CLAIMS MADE AND IN NOT DISPOSING THE APPEAL BASED ON SUCH SUBMISSIONS. 05. THE LEARNED CIT(A) ERRED IN NOT ADMITTING A FRE SH CLAIM IN RELATION TO CLAIM OF SET OFF OF LOSSES BROUGHT FORW ARD AND IN NOT DIRECTING THE ASSESSING OFFICER TO EXAMINE THE CLAI M. 06. THE LEARNED CIT(A) ERRED IN NOT PASSING A SPEAK ING ORDER FOR HER NOT TO CONSIDER THE GROUNDS OF APPEAL IN RELATI ON TO CLAIM OF SET OFF LOSSES BROUGHT FORWARD. 4 ITA NO. 1243/H/15 PFEIFFER VACUUM TECHNOLOGY INDIA (P) LTD. 6. LD. AR SUBMITTED THAT THE COMPANY PAID COMPENSAT ION TO ITS OUTGOING MD RS. 40.25 LAKHS DUE TO MERGER OF THE CO MPANY WITH PFEIFER VACUUM TECHNOLOGY (P) LTD AND THE SAID PAY MENT WAS STRICTLY AS PER EMPLOYMENT AGREEMENT WITH HIM. HE CONTENDED THAT THE ASSESSING OFFICER WRONGLY TREATED THIS PAYMENT AS C APITAL IN NATURE. IT HAS TO BE TREATED AS SALARY. TO SUPPORT HIS CONTENT ION, LD. AR BROUGHT TO OUR NOTICE THE AGREEMENT OF EMPLOYMENT, TERMINAT ION AGREEMENT, WHICH ARE PART OF PAPER BOOK. 7. LD. DR SUBMITTED THAT THE LANGUAGE USED IN DRAFT ING THE TERMINATION AGREEMENT (REFER PAGE 64 OF PAPER BOOK) THAT IT CLEARLY DEMONSTRATES THE INTENTION TO MAKE PAYMENT FOR NON- COMPETE FEES. ACCORDING TO HIM, IT IS NOT IMPORTANT HOW THE ASSES SEE TREATS THE SAME IN THE BOOKS OF ACCOUNTS AND HE RELIES ON THE ORDER OF THE ASSESSING OFFICER. 8. CONSIDERED THE SUBMISSIONS OF BOTH THE COUNSELS AND PERUSED THE MATERIAL FACTS ON RECORD. THE AO MADE THE DISAL LOWANCE OF RS. 40,25,000/- TOWARDS COMPENSATION/SETTLEMENT TO THE ERSTWHILE MD OF THE ASSESSEE COMPANY, ON THE GROUND THAT THE PAYMEN T WAS FOR NON- COMPETITION AND BEING IN CAPITAL NATURE. THE CIT(A) CONFIRMED THE ACTION OF THE AO ON THE GROUND THAT THE ASSESSEE FA ILED TO PRODUCE A COPY OF THE RETURN OF INCOME FILED BY THE MD. ON PE RUSAL OF RECORD, WE FIND THAT THE SAID AMOUNT MENTIONED IN THE ANNUAL R EPORT FOR THE AY UNDER CONSIDERATION UNDER SCHEDULE 4.0 NOTES ON A CCOUNTS. (REFER PAPER BOOK AT PAGE 45). AT PAGES 54 & 55, A COPY OF THE FORM 16 ISSUED TO THE MD IS PLACED BY THE ASSESSEE WHEREIN AT ANNEXURE B DETAILS OF TAX DEDUCTED AND DEPOSITED IN THE CENTRA L GOVT. ACCOUNT HAVE BEEN SHOWN. IN OUR VIEW, CALLING FOR THE RETUR N OF INCOME OF THE M.D. IS UNCALLED FOR. WHAT IS RELEVANT IS THE ACCOU NTING TREATMENT OF THE ASSESSEE. IT HAD FOLLOWED THE TERMS OF EMPLOYME NT WITH THE MD AND ACCORDINGLY MADE PAYMENT OF COMPENSATION. COPY OF THE AGREEMENT WITH MD HAS BEEN PLACED AT PAGES 56 TO 62 OF THE PAPER BOOK, WHEREIN CLAUSE 12 OF THE AGREEMENT READS AS UNDER: 5 ITA NO. 1243/H/15 PFEIFFER VACUUM TECHNOLOGY INDIA (P) LTD. IN THE EVENT THE COMPANY DECIDES TO TERMINATE THE A GREEMENT DUE TO RESTRUCTURING OR ANY OTHER REASON EXCEPT TH OSE IDENTIFIED ABOVE, THE COMPANY AGREES TO PAY A COMPENSATION OF ONE YEAR SALARY WITH ALL BENEFITS AND FULL BONUS AS FINAL S ETTLEMENT WITHIN 30 DAYS OF MR. RAJAT SABHARWAL DEMITTING OFFICE. AT PAGES 63 & 64 OF PAPER BOOK, A COPY OF SETTLEMEN T AGREEMENT WITH MD HAS ALSO BEEN PLACED. WE ARE OF THE VIEW THAT TH E SERVICES OF THE MD WERE TERMINATED BECAUSE THE MERGER OF THE ASSESS EE COMPANY TOOK PLACE. THEREFORE, THE COMPENSATION PAID TO TH E MD WAS AS PER THE AGREEMENT BETWEEN THE ASSESSEE AND THE MD. THE AO WAS WRONG IN DISALLOWING THE AMOUNT AS CAPITAL IN NATUR E. THE MATERIAL PLACED IN THE PAPER BOOK DEMONSTRATES THAT THE COMP ENSATION PAID TO MD IS AS PER THE AGREED TERMS. ALSO, IT IS COMMON P RACTICE IN CASE OF TERMINATION OF EMPLOYMENT TO PUT FORTH THE CONDITIO N NOT TO ENGAGE IN ACT OF COMPETITION FOR A YEAR. THIS CANNOT BE CONSI DERED TO TREAT THE ABOVE PAYMENT AS CAPITAL IN NATURE. THEREFORE, WE S ET ASIDE THE ORDER OF THE CIT(A) AND DELETE THE ADDITION MADE BY THE A O TOWARDS COMPENSATION/SETTLEMENT PAYMENT MADE TO THE MD OF THE ASSESSEE. 9. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED . PRONOUNCED IN THE OPEN COURT ON 21 ST SEPTEMBER, 2016. SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RAHM AN) JUDICIAL MEMBER A CCOUNTANT MEMBER HYDERABAD, DATED: 21 ST SEPTEMBER, 2016 KV 6 ITA NO. 1243/H/15 PFEIFFER VACUUM TECHNOLOGY INDIA (P) LTD. COPY TO:- 1) M/S PFEIFFER VACUUM TECHNOLOGY INDIA (P) LTD., C/O A. RAMACHANDRA RAO & CO., CAS., 1 ST FLOOR, 3-6-69/A/11, STREET NO. 1, HIMAYAT NAGAR, HYDERABAD 500 029. 2) DCIT, CIRCLE 16(3),, HYDERABAD 3) CIT(A) - 4, HYDERABAD 4 PR. CIT - 4, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. S.NO. DESCRIPTION DATE INTLS DS1. DRAFT DICTATED ON SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./ P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER