ACIT, CHENNAI V. Madras Engineering Industries Ltd., CHENNAI

ITA 125/CHNY/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8483 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2016
• Appeal Filed By: Department
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 22-01-2016
• Court: TRIBUNAL
• Department Lawyers: SHIVA SRINIVASJ
• Assessee Lawyers: S SUNDARAMAN
• Keywords: Business income; Transfer pricing; International transaction; Rule of consistency; Retrospective amendment; Fair market value
• Section: 37(1)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : CHENNAI . . . , . . ' #$, & '( ) BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S.SUNDER SINGH, ACCOUNTANT MEMBER ./ I.T.A.NOS.2259,2260 & 2261/MDS./2015 / ASSESSMENT YEARS : 2010-11,2011-12 & 2012-13 M/S. MADRAS ENGINEERING INDUSTRIES PVT LTD., 14,SATHYANARAYANA AVENUE, R.A PURAM, CHENNAI 600 028. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-4(1), CHENNAI 600 034. [PAN AAACM 4509 P ] ( *+ / APPELLANT) ( ,-*+ /RESPONDENT) ./ I.T.A.NOS.126,125 & 130/MDS./2016 / ASSESSMENT YEARS : 2010-11,2011-12 & 2012-13 DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-4(1), CHENNAI 600 034. VS. M/S. MADRAS ENGINEERING INDUSTRIES PVT LTD., 14,SATHYANARAYANA AVENUE, R.A PURAM, CHENNAI 600 028. [PAN AAACM 4509 P ] ( *+ / APPELLANT) ( ,-*+ /RESPONDENT) REVENUE BY : MR.SHIVA SRINIVAS, JCIT,DR ASSESSEE BY : MR.S.SUNDARAMAN, C.A / DATE OF HEARING : 27 - 07 - 201 6 / DATE OF PRONOUNCEMENT : 21 - 09 - 2016 MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 2 -: / O R D E R PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER THESE THREE CROSS APPEALS ARE FILED BY THE ASSES SEE IN ITA NOS. 2259, 2260 & 2261/MDS./2015 & THE REVENUE IN ITA NOS. 126, 125 & 130/MDS./2016 ARE DIRECTED AGAINST THE COMMON ORDER OF THE LEARNE D COMMISSIONER OF INCOME TAX(A)-8, CHENNAI DATED 30.1 0.2015 PERTAINING TO THE ASSESSMENT YEARS 2010-11,2011-12 & 2012-13 . SINCE ISSUES INVOLVED IN ALL THESE REVENUES APPEALS AS W ELL AS ASSESSEES APPEAL ARE COMMON IN NATURE, THESE APPEALS ARE CLUB BED TOGETHER, HEARD TOGETHER, DISPOSED OFF BY THIS COMMON ORDER F OR THE SAKE OF CONVENIENCE. REVENUE APPEALS: (I) ITA NO.126/MDS./12(REVENUES APPEAL: 2010-11) (II) ITA NO.125/MDS./12(REVENUES APPEAL: 2011-12) (III)ITA NO.130/MDS./12(REVENUES APPEAL: 2012-13) 2. REVENUE HAS TAKEN ALTOGETHER THREE GROUNDS OF WH ICH GROUND NOS.1 & 3 ARE GENERAL IN NATURE, REQUIRING NO SPECI FIC ADJUDICATION. 3. THE COMMON GROUND IN ALL THESE REVENUES APPEAL ARE RELATED TO THE DISALLOWANCE MADE BY THE AO U/S.40A(2) OF THE A CT AS PAYMENTS OF COMMISSION WERE CONSIDERED EXCESSIVE, WHICH WERE DELETED BY THE LD.CIT(A). MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 3 -: 4.0 PROFIT COMMISSION TO SHRI E.K. PATHASARATHY : THE LEARNED ASSESSING OFFICER FOUND THAT THE ASSESSEE COMPANY H AS PAID PROFIT COMMISSION TO SHRI E.K. PATHASARATHY, CHAIRMAN & MA NAGING DIRECTOR(CMD) APART FROM THE PAYMENT OF FIXED SAL ARY AS FOLLOWS: ASSESSMENT YEAR COMMISSION SALARY 2011-11 RS.349.37 LACS 32.00 LACS 2011-12 RS.371.86 LACS 60.00 LACS 2012-13 RS.347.01 LAKHS 60.00 LACS (BEING 20% OF THE PROFIT BEFORE TAX) THE AO FOUND THAT THE AMOUNT PAID TO SHRI E.K. PATH ASARATHY FALLS UNDER THE AMBIT OF SECTION 40A(2) OF THE ACT, SINCE HE IS HOLDING SUBSTANTIAL INTEREST IN THE COMPANY. IT WAS SUBMI TTED THAT SHRI E.K. PATHASARATHY WAS THE FOUNDER DIRECTOR OF THE COMPA NY ,WITH HIS HIGH EDUCATIONAL QUALIFICATION, EXPERIENCE AND LEADERSHI P QUALITIES HE MADE THE COMPANY AS PIONEER IN AUTO ANCILLARY INDUSTRY A ND ACHIEVED THE SALES OF 237.81 CRORES OF TURNOVER AND A PROFIT OF 23.27 CRORES FOR A.Y 2012-13. BUT FOR THE COMMITTED AND UNTIRING EFFORTS OF MR.PARTHASARATHY THE COMPANY WOULD NOT HAVE ACHIEVE D THE SAID BUSINESS GOALS. FURTHER, THE ASSESSEE ALSO STATED B EFORE THE AO THAT THE COMMISSION IS BEING PAID TO THE MANAGING DIRECT OR FROM THE ASSESSMENT YEAR 2003-04, WHICH WAS ACCEPTED BY THE DEPARTMENT. FROM THE ASSESSMENT YEARS 2003-04 TO 2004-05, THE C OMMISSION WAS MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 4 -: PAID @ 11% OF THE PROFIT, FROM THE ASSESSMENT YEAR 2004-05 TO 2009- 10, THE COMMISSION WAS PAID @ 20% AND FROM ASSESSME NT YEAR 2011- 12 ONWARDS @ IT WAS PAID 15%. IN THE EARLIER YEARS, THE PAYMENT OF COMMISSION WAS NOT DISPUTED BY THE DEPARTMENT. THE AO, THOUGH APPRECIATED THE EFFORTS MADE BY THE MANAGING DIRECT OR, BUT NOT CONVINCED WITH THE ARGUMENT OF ASSESSEE AND DISALL OWED THE AMOUNT OF RS. 3,49,37,597/- FOR THE A.Y.2010-11,RS. 371.86.LACS F OR THE A.Y2011-12 AND RS.347.01 LACS FOR THE A.Y.2012-13 A S PER THE PROVISIONS OF THE SECTION U/S.40A(2)(A) OF THE ACT. AGGRIEVED, THE ASSESSEE WENT ON APPEAL BEFORE THE LD.CIT(A). 4.1 ON APPEAL, LD.CIT(A) DELETED THE ADDITION HOLD ING THAT PROFIT COMMISSION PAID TO SHRI E.K. PATHASARATHY WAS REASO NABLE AND PAID KEEPING IN VIEW OF THE LEGITIMATE NEEDS OF THE COMP ANY AND THE BENEFITS DERIVED BY THE COMPANY. FURTHER LD.CIT ( A) OBSERVED THAT SHRI E.K. PATHASARATHY IS ASSESSED TO TAX AND THE C OMMISSION PAID BY THE COMPANY WAS ADMITTED AS INCOME IN HIS INCOME T AX RETURNS FOR THE RELEVANT ASSESSMENT YEARS AND PAID THE RESULTAN T TAXES. CONSEQUENTLY THERE IS NO REVENUE LOSS. AGGRIEVED WI TH THE ORDER OF LD.CIT(A), THE DEPARTMENT IS IN APPEAL BEFORE THE T RIBUNAL. 4.2. BEFORE US, LD.D.R ARGUED THAT SHRI E.K. PATHA SARATHY AND FAMILY ARE HOLDING SHARES OF 60.4% IN THE COMPANYS EQUITY AND THE SERVICES RENDERED BY HIM WERE COMPENSATED BY REMUNERATION PA ID TO HIM AND MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 5 -: THERE IS NO NEED TO MAKE FURTHER PAYMENT IN THE FO RM OF PROFIT COMMISSION SINCE NO SUCH COMMISSION WAS PAID TO ANY OF THE EMPLOYEES OR STAFF MEMBERS WHO ARE WORKING IN THE C OMPANY. SINCE IT IS A PRIVATE LIMITED COMPANY, THE LD.D.R HAS ARGUED THAT THE PROFIT OF THE COMPANY IS DISTRIBUTED AMONG THE FAMILY MEMBERS DEPRIVING OTHER SHAREHOLDERS OF THEIR SHARE IN THE KITTY. 4.3. ON THE OTHER HAND, LD.A.R SUBMITTED THAT SHRI E.K. PARTHASARATHY WAS THE CHAIRMAN AND MANAGING DIRECTO R(CMD) OF THE COMPANY AND WAS RESPONSIBLE FOR LEADING THE COMPANY FOR LONG TERM STRATEGY WITH A VIEW TO CREATING SHARE HOLDER VALUE . HIS LEADERSHIP ROLE IS RESPONSIBLE FOR ALL MANAGEMENT DECISIONS FOR IMP LEMENTING THE ASSESSEE COMPANYS LONG TERM/SHORT TERM PLANS. BE CAUSE OF HIS CONTINUOUS EFFORTS AND THE DEDICATED SERVICES, EXPE RIENCE AND MARKETING STRATEGIES AND LIAISON WITH OTHER ORGANIZ ATIONS, THE COMPANY HAS ACHIEVED THE TOTAL SALES OF 142.25 CRORES FOR T HE YEAR ENDED 31.03.2010. FURTHER, THE LD.A.R HAS HIGHLIGHTED THA T THE COMPANY IS ONE OF THE LEADING COMPANY FOR THE PRODUCTION OF SL ACK ADJUSTERS. FURTHER, THE LD.A.R ALSO SUBMITTED THAT IT IS NOT A NEW PHENOMENA FOR PAYMENT OF SALARY AND PROFIT COMMISSION IN THE INDU STRY. IT IS VERY COMMON PRACTICE TO MAKE THE PAYMENT OF SALARY AND P ERFORMANCE BASED COMMISSION TO THE MANAGERIAL STAFF OF THE COM PANIES IN BOTH MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 6 -: PRIVATE LIMITED AND PUBLIC LIMITED COMPANIES FURTH ER, LD.A.R RELIED ON THE FOLLOWING DECISIONS IN SUPPORT OF HIS ARGUMENT. I) IN THE CASE OF ABBAS WAZIR (P) LTD. VS. CIT REP ORTED IN 265 ITR 77(ALLAHABAD). II) IN THE CASE OF CIT VS. COMPUTER GRAPHICS LTD., REPORTED IN 285 ITR 84(MADRAS.) III) IN THE CASE OF CIT VS. EDWARD KEVENTER (PRIVA TE) LTD., REPORTED IN 86 ITR 370. IV) IN THE CASE OF CIT VS. CAREER LUNCHER INDIA LT D. REPORTED IN 358 ITR 179(DEL.) V) IN THE CASE OF NEW SILK ROUTE ADVISORS (P) LTD. VS. DCIT REPORTED IN 55 TAXMANN.COM 540(MUM. TRIB). THE A.R ALSO ARGUED THAT THE AO DISALLOWED THE EXP ENDITURE U/S 40A(2) OF INCOME TAX ACT WHICH CLEARLY SPECIFIES TH AT THE EXPENSES INCURRED BY THE ASSESSEE IN RESPECT OF A SPECIFIED PERSON WHICH ARE NOT DIRECTLY PROPORTIONATE TO THE SERVICES RENDERED /GOODS OFFERED, ATTRACT PROVISIONS TO FIND OUT WHETHER SUCH EXPEND ITURE WAS REASONABLE IN RELATION TO THE FAIR MARKET VALUE OF THE GOODS/SERVICES OFFERED WERE INCURRED FOR THE LEGITIMATE NEEDS OF T HE ASSESSEE. THE AO CAN DISALLOW SO MUCH EXPENDITURE WHICH IS EXCESSIVE OR UNREASONABLE. THE AR CONTENENDED THAT IN THE PRESENT CASE THERE I S NOTHING TO SUGGEST THAT THE AO FOUND THE PAYMENT OF REMUNERATI ON/COMMISSION TO DIRECTOR WAS EXCESSIVE HAVING REGARD TO FAIR MAR KET VALUE OF THE MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 7 -: SERVICES OR FACILITIES RENDERED BY HIM. THEREFORE T HE AR VEHEMENTLY OPPOSED THE DISALLOWANCE MADE U/S 40A(2) OF INCOME TAX ACT. 4.4. WE HAVE HEARD BOTH THE PARTIES AND PERUSED TH E MATERIAL PLACED ON RECORD. THE AO DISALLOWED THE COMMISSION U/S.40A (2)(A) OF THE ACT HOLDING THAT COMMISSION PAID WAS IN EXCESS OR UNREA SONABLE HAVING REGARD TO THE MARKET VALUE OF THE GOODS/SERVICES. I N THE PROCESS, THE AO HAS DISALLOWED THE ENTIRE COMMISSION PAID TO SH RI E.K. PARTHASARATHY, MANAGING DIRECTOR. HOWEVER, THE AO H AS NOT BROUGHT ON RECORD ANY COMPARABLE CASES AND QUANTIFIED THE R EASONABLE AMOUNT. THE AO HAS NOT DISPUTED THE FACT THAT THE SHRI E.K. PARTHASARATHY, MANAGING DIRECTOR WAS RENDERING THE VALUABLE SERVICES AND BECAUSE OF ALL HIS EFFORTS, THE COMPANY HAS PRO GRESSED IN ITS VENTURES AND GAINED THE PROFITS MADE ITS IMAGE IN THE BUSINESS. THE AO IS NOT DISPUTING THE FACT THAT THE EXPENDITURE W AS LAID OUT FOR THE PURPOSE OF BUSINESS AND NOT DOUBTED GENUINENESS OF THE PAYMENT. AS PER SECTION 40A(2) OF INCOME TAX ACT THE EXPENDITUR E IN EXCESS OF THE FAIR MARKET VALUE OF THE SERVICES RENDERED BY THE S PECIFIED PERSON COMES UNDER THE SCANNER. IN THIS CASE THE AO HAS DI SALLOWED THE ENTIRE COMMISSION PAID TO MR. PARTHASARATHY WITHOUT BRINGI NG ANY TANGIBLE EVIDENCE TO SUGGEST THAT THE COMMISSION PAID WAS IN EXCESS OF SERVICES RENDERED BY HIM. THEREFORE THE IS NO CASE FOR MAKING ANY ADDITION U/S 40A(2) OF INCOME TAX ACT. MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 8 -: 4.5 THE ASSESSEE COMPANY IS MAKING THE PAYMENT OF COMMISSION TO SHRI E.K. PARTHASARATHY, RIGHT FROM THE ASSESSMENT YEAR 2002-03 ONWARDS, WHICH WAS ACCEPTED BY THE DEPARTMENT. THOU GH THE RULE OF RES JUDICATA IS NOT APPLICABLE TO THE INCOME TAX PR OCEEDINGS BUT THE RULE OF CONSISTENCY DOES APPLICABLE TO THE TAX ASSE SSMENT AS REFERRED BY THE LD.A.R IN THE CASE OF CIT VS. LG RAMAMURTHY REPORTED IN 110 ITR 453(MAD.) & RADHASOAMI SATSANG VS CIT. IN THE CASE OF SAME ASSESSEE FOR THE DIFFERENT ASSESSMENT YEARS, CONTR ADICTORY DECISIONS CANNOT BE TAKEN ON THE SAME SET OF FACTS. 4. 6 THE LD.CIT (A) HAS REFERRED THE DECISIONS OF THE MUMBAL HIGH COURT IN THE CASE OF KARONDAS RANCHHODDASS VS. COMM ISSIONER OF INCOME TAX (83 ITR 1), THE CALCUTTA HIGH COURT IN T HE CASE OF SMT SAKTI RANI ROY VS. COMMISSIONER OF INCOME TAX (115 ITR 722), THE ALLAHABAD HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. KAMALA TOWN TRUST (198 ITR 191), THE KERALA HIGH CO URT IN THE CASE OF P.KRISHNA WARNER (208 ITR 823) AND THE DELHI HIG H COURT IN THE CASE OF CIT VS NEO POLYPACK (P) LTD., (245 ITR 492) WHERE IN IT WAS CONSISTENTLY HELD THAT THE JUDICIAL PROPRIETY REQUI RES CONSISTENCY AND AS LONG AS THE FINDING OF FACT IS NOT DISPUTED AND THE RE ARE NO FRESH MATERIAL OR OTHER CIRCUMSTANCES DEMONSTRATING OR DE MANDING FRESH LOOK INTO THE MATTER, THERE CAN BE NO INHIBITION RE LYING ON THE EARLIER DECISION. MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 9 -: 4 .7 THE JURISDICTIONAL MADRAS HIGH COURT IN THE CAS E OF COMMISSIONER OF INCOME TAX VS. LG RAMAMURTHY (110 I TR 453) HELD THAT THE DOCTRINE OF RESJUDICATA CAN BE INVOKED IN TAX PROCEEDINGS WHICH HAVE A BINDING EFFECT ON THE REVENUE, IF THE FACTS BETWEEN TWO ASSESSMENT YEARS ARE THE SAME. IN OTHER WORDS, IT I S NOT CORRECT FOR THE ASSESSING OFFICER TO BEGIN A FRESH LITIGATION I N THE ABSENCE OF ANY NEW MATERIAL OR CHANGE IN THE CIRCUMSTANCES ON THE PREMISE THAT THERE ARE NEW VIEWS, CLOSER AND MORE INTELLIGENT AN ALYSIS. THE LD. ASSESSING OFFICER HAD NOT DOUBTED THE GENUINENESS O F THE PAYMENT AND SHRI E.K. PARTHASARATHY, MANAGING DIRECTOR HAS ADMITTED THE RECEIPT AS HIS INCOME IN HIS RETURN OF INCOME AND P AID THE RELEVANT TAXES. THEREFORE, WE DO NOT FIND ANY INFIRMITY IN T HE ORDER OF LD.CIT(A) AND THE ORDER OF LD.CIT(A) IS UPHELD AND THE GROUN D RAISED BY THE REVENUE ON THE ADDITION OF PROFIT COMMISSION TO MR. E.K. PARTHASARATHY STANDS DISMISSED. 5.0. THE SECOND COMMON ISSUE IN ALL THE REVENUES APPEA L IS RELATED TO THE DISALLOWANCE MADE BY THE AO U/S.40A(2)(A) OF T HE ACT AS GUARANTEE COMMISSION PAID THE SHRI E.K. PARTHASARAT HY, THE CHAIRMAN AND THE MANAGING DIRECTOR AND SMT RADHA PA RTHA SARATHY,DIRECTOR @ ` 41,20,000/- EACH. MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 10 - : 6. DURING THE ASSESSMENT YEAR 2010-11, THE ASSESSE E CLAIMED THE GUARANTEE COMMISSION PAID TO THE DIRECTORS, MR.E.K. PARTHASARATHY, ` 41,20,000/- AND MRS. RADHA PARTHASARATHY ` 41,20,000/- AGGREGATING TO ` 82,40,000/- TOWARDS THE PERSONAL GUARANTEES GIVEN B Y THE DIRECTORS FOR THE BANK LOANS AS EXPENDITURE. THE C OMMISSION WAS PAID @ 2% ON THE SANCTIONED LIMIT BY THE SBI. BOTH MR.PARTHASARATHY AND MRS.RADHA PARTHASARATHY ARE THE DIRECTORS OF THE COMPANY HOLDING 45.78% OF SHARES IN THE COMPANY, APART FROM THE SHA RES HELD BY HUF AND FAMILY MEMBERS IN THE ASSESSEES COMPANY. DURIN G THE ASSESSMENT PROCEEDINGS, THE AO HELD THAT THE EXPEND ITURE FALLS UNDER THE AMBIT OF SEC.40A(2)(A) OF THE ACT. THE AO DISAL LOWED THE GUARANTEE COMMISSION HOLDING THAT THE COMPANY HAS N OT AVAILED ANY ADDITIONAL SERVICES FROM THE DIRECTORS MORE THAN WH AT IS EXPECTED OF FROM THE DIRECTORS AND THE EXPENDITURE WAS NOT INC URRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND IT WAS PAID FOR THE BENEFIT OF THE DIRECTORS. ON APPEAL, THE LD.CIT(A) ALLOWED THE EX PENDITURE HOLDING THAT THE GUARANTEE COMMISSION PAID TO THE DIRECTORS WAS REASONABLE. WHILE DELETING THE ADDITION THE LD.CIT(A) RELIED O N THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ADDL CIT VS. A KKAMAMBA TEXTILES LTD., REPORTED IN (1998) 144 CTR (SC) 172 AND IN THE CASE OF MAHALAKSHMI SUGAR MILLS CO. LTD. VS. CIT IN 252 ITR 0691(DEL.). MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 11 - : 6.1 BEFORE US, THE LD.D.R ARGUED THAT THE GUARANTEE COM MISSION PAID TO THE DIRECTORS WAS IN NO WAY CONNECTION WITH SERV ICE RENDERED BY THE DIRECTORS. LD.D.R PLACED RELIANCE ON THE ASSESSMENT ORDER AND ALSO RELIED ON THE DECISION OF HONBLE KARNATAKA HIGH CO URT IN THE CASE OF CIT VS. UNITED BREWERIES REPORTED IN 204 TAXMAN 24 4 (2012) AND ALSO THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE C ASE OF CORONATION FLOUR MILLS VS. ACIT REPORTED IN 314 ITR 1(2009). 6 .2 ON THE OTHER HAND LD.A.R ARGUED THAT DIRECTORS HAVE NO PERSONAL RESPONSIBILITY TO STAND AS A SURETY FOR THE CREDIT FACILITIES GRANTED BY THE BANKS. BY STANDING AS CREDITORS FOR THE PURPOSE OF LOAN GRANTED BY THE BANKS, THE LIABILITY OF THE DIRECTORS INCREASES AND IT IS CO-TERMINUS WITH THAT OF THE BORROWER. THEREFORE, THE COMPENSATION I S PAID FOR THE RISKS AND RESPONSIBILITIES TAKEN BY THE DIRECTORS WHICH I S A NORMAL PRACTICE IN THIS LINE OF BUSINESS. FURTHER, HE ARGUED THAT EVEN THE INCOME TAX AMENDMENT WAS BROUGHT BY THE FINANCE ACT, 2012 WITH RETROSPECTIVE EFFECT FROM 01.04.2012 BY WAY OF EXPLANATION TO SEC .92B, GIVING OF GUARANTEES AS AN INTERNATIONAL TRANSACTION. FURTHER , THE MINISTRY OF FINANCE VIDE ITS OFFICE MEMORANDUM DATED 24.10.1993 HAS ITSELF PRESENTED THE RATE OF GUARANTEE COMMISSION TO BE PA ID BY PUBLIC SECTOR INSTITUTIONS FOR WHICH IT HAD GUARANTEED THE LOANS TAKEN FROM THE BANKS OR FINANCE INSTITUTIONS, THE OWNER OF WHI CH IS A GOVERNMENT MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 12 - : ITSELF. HE FURTHER STATED THAT THE COMPANY HAS PHAS ED OUT THE PAYMENT OF COMMISSION OVER THE YEARS. IN THE EARLIER FINANC IAL YEARS KEEPING IN VIEW OF THE BUSINESS RISK, THE COMMISSION WAS PAID @ 2% DIRECTLY LINKED TO THE CREDIT FACILITIES SANCTIONED. SUBSEQU ENTLY, WHEN THE ASSESSEES PRODUCTS BECAME ACCEPTED IN THE MARKETS, FROM THE FINANCIAL YEARS 2007-08 TO 2009-10, EVEN THOUGH THE SANCTIONED LIMIT IS ENHANCED, THE GUARANTEE COMMISSION WAS RESTRICTED T O 2% OF ` 20.60 CRORES ONLY. FURTHER, HE SUBMITTED THAT FROM F.Y. 2 010-11 ONWARDS, PAYING THE GUARANTEE COMMISSION WAS COMPLETELY STOP PED. THE ASSESSEE ALSO RELIED ON THE DECISION OF HONBLE CA LCUTTA HIGH COURT IN THE CASE OF INDIA JUTE CO. LTD., VS. CIT (178 ITR 6 49) WHEREIN IT WAS HELD THAT THE PAYMENT OF GUARANTEE COMMISSION IS A NORMAL AND ACCEPTED PRACTICE AND DELHI HIGH COURT IN THE CASE OF CONTROLS & SWITCHGEAR CONTRACTORS LTD. VS. DCIT (W.P.(C) 2845/ 2014/CM APPL 5898/2014) WHEREIN IT WAS HELD THAT ACT OF THE DIR ECTORS IN PROVIDING THEIR PERSONAL GUARANTEES AND UNDERTAKING THE ATTEN DANT RISKS IS CLEARLY BEYOND THE SCOPE OF THEIR SERVICES AS DIRECTORS AND THAT THE TRANSACTIONS IN CONSIDERATION FOR WHICH COMMISSIONS WERE PAID BY THE ASSESSEE TO IT S DIRECTORS ARE REAL. IT FURTHER STA TED THAT THE DIRECTORS HAVING PROVIDED THEIR PERSONAL GUARANTEE HAVE ACTED BEYOND THE CALL DUTY AND THE FACT THAT THE ASSESSEE IN ITS COMMERCI AL WISDOM HAS AGREED TO PAY COMMISSION FOR THE FURNISHING OF SUCH GUARANTEES MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 13 - : CANNOT BE FLAWED, AS IT IS WELL SETTLED THAT IT IS ASSESSEES DISCRETION AS TO WHICH EXPENDITURE IS NECESSARY AND TO WHAT EXTEN T AND IT IS NOT WITHIN THE JURISDICTION OF THE AO TO IMPOSE HIS VIEWS WITH REGARD TO THE NECESSITY OR THE QUANTUM OF THE EXPEN DITURE UNDERTAKEN BY AN ASSESSEE FOR THE AO HAS ONLY TO DETERMINE WHE THER THE TRANSACTIONS ARE GENUINE AND REAL. THE AUTHORISE D REPRESENTATIVE OF ASSESSEE ALSO FURNISHED A COPY OF SANCTION ADVICE O F THE SBI DATED 19.01.2007. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE ASSESSEE COMPANY HAS PAID 2% OF GUARANT EE COMMISSION ON ` 20.60 CRORES CREDIT LIMITS SANCTIONED BY SBI TO BOT H MR.PARTHASARATHY & MRS. RADHA PARTHASARATHY, DIRECT ORS, AGGREGATING THE PAYMENT OF ` 82.40 LACS. THE ASSESSEE SUBMITTED THAT GUARANTEE COMMISSION WAS PAID IN THE EARLIER YEARS ALSO I.E. F.Y 2001-02 ONWARDS WHICH WAS ACCEPTED BY THE DEPARTMENT. THERE IS NO CHANGE IN THE FACTS AS SUBMITTED BY THE ASSESSEE. THE AO DISALLO WED THE COMMISSION HOLDING THAT THE PAYMENT WAS MADE FOR TH E PERSONAL BENEFIT OF THE DIRECTORS WITHOUT RENDERING ANY ADDI TIONAL SERVICES. WE HAVE GONE THROUGH THE SANCTION ADVICE OF SBI DATED 19.01.2007. THE SANCTION ORDER SUBMITTED BY THE ASSESSEE WAS RELEVA NT TO THE F.Y 2006-07 RELATING TO THE ASSESSMENT YEAR 2007-08 BU T NOT TO THE ASSESSMENT YEAR UNDER DISPUTE WHICH IS 2010-11. AS PER THE SANCTION MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 14 - : MEMO THE EXISTING CREDIT LIMITS UNDER VARIOUS HEAD S WERE ` 15.91 CRORES AND REVISED LIMIT WAS ` 20.91 CRORES. THE PRIMARY SECURITY OF THE LOANS WAS FIRST CHARGE ON THE ENTIRE CURRENT A SSETS SUCH AS STOCKS, STORES AND CONSUMABLES, DOCUMENTS OF TITLE TO GOODS FOR FBDN LIMITS, GOODS COVERED UNDER LC FOR THE LIMITS SANCTIONED U NDER LC LIMITS, COUNTER GUARANTEE AND CHARGE OVER CURRENT ASSETS FO R LG LIMITS AND FOR TERM LOAN FIRST CHARGE ON FIXED ASSETS OF THE COMPA NY AND EQUITABLE MORTGAGE OF FACTORY LANDS. THE VALUE OF THE PROP ERTIES OFFERED AS COLLATERAL SECURITY WAS NOT FURNISHED BY THE LD.A.R . THERE IS MERE MENTION OF PERSONAL GUARANTEES OF MR.PARTHASARATHY & MRS. RADHA PARTHASARATHY, BUT NO PERSONAL ASSETS WERE REQUIRED TO BE MORTGAGED OR GIVEN AS SECURITY FOR THE CREDIT FACILITIES GRA NTED TO THE COMPANY. THOUGH THE LIABILITY OF THE DIRECTORS WAS CO-TERMIN US WITH THAT OF THE BORROWER, THERE IS A THE COMPLETE COVERAGE OF SECUR ITY IN FORM OF THE ASSETS OF THE COMPANY. THE COMPANY HAS HUGE FACTORY LAND OF 24010 SQ.FT IN PRIME AMBATTUR INDUSTRIAL ESTATE, 0.5672 A CRES OF LAND WITH BUILDING IN INDUSTRIAL ESTATE, MARAIMALAI NAGAR, AN D LEASEHOLD RIGHTS ON SEZ FACTORY LAND ADMEASURING 5.25 ACRES IN SEZ(MAHI NDRA WORLD CITY) WHICH WAS OFFERED AS SECURITY BY WAY OF MORTGAGE. T HE MARKET VALUE OF THE ABOVE SECURITIES OFFERED WAS NOT FURNISHED B Y THE ASSESSEE AND IN ANY CASE THE SECURITIES COVER THE ENTIRE CREDIT LIMITS SATISFACTORILY. AS PER THE BALANCE SHEET AGAINST THE SANCTIONED LIMITS OF ` 20.60 CRORES BY MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 15 - : BANKS, THE OUTSTANDING LOANS WERE ` 7,83,34,832/- AND THE COMPANYS RESERVES AND SURPLUS WAS ` 39.85 CRORES AND BOOK VALUE OF CURRENT AND FIXED ASSETS OFFERED AS SECURITY WAS ` 58.73 CRORES WHICH CLEARLY SHOWS THE FINANCIAL SOUNDNESS OF THE COMPANY AGAINST WHI CH THE BANKS HAVE GRANTED THE CREDIT FACILITIES. IN THIS FINANCIAL BA CKGROUND OF THE COMPANY AND THE VALUE OF ASSETS OFFERED AS PRIMARY AND COLLATERAL SECURITY TO THE LOANS, IT IS ONLY MERE FORMALITY TO GIVE PERSONAL GUARANTEE OF THE DIRECTORS. IN CASE OF DEFAULT THOU GH THE LIABILITY OF THE GUARANTOR COTERMINUS WITH THAT OF THE BORROWER THE BANKS PROCEED TO RECOVER FROM PRIMARY AND COLLATERAL SECURITIES FIRS T INSTEAD OF PROCEEDING ON THE GUARANTORS. THOUGH THE LD. COUNS EL ARGUED VEHEMENTLY THAT THERE WAS PERSONAL RISK ON THE ASSE TS OF THE DIRECTORS AND THE JOINT LIABILITY FOR REPAYMENT OF LOAN THERE WAS NO EVIDENCE PRODUCED REGARDING ANY PERSONAL ASSETS GIVEN AS SEC URITY. THE ASSESSEE ALSO HAS NOT FURNISHED THE EVIDENCE OF WEA LTH TAX RETURNS SUBMITTED TO THE BANK. THE CASE LAWS RELIED UP ON B Y THE LD CIT(A) AS WELL AS THE LD.A.R RELATES TO THE QUESTION WHETHER THE GUARANTEE COMMISSION IS AN ALLOWABLE EXPENDITURE OR NOT FOR W HICH THE HONBLE COURTS HAVE ANSWERED AFFIRMATIVELY. BUT IN THE CASE OF THE APPELLANT AS DISCUSSED ABOVE THE LOANS WERE GRANTED ON THE STREN GTH OF THE FINANCIAL SOUNDNESS AND THE VALUE OF THE ASSETS OF THE COMPANY AND THERE IS NO RISK INVOLVED/FORESEEN TO THE DIRECTORS . THEREFORE, THE CASE MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 16 - : LAWS RELIED BY THE ASSESSEE ARE NOT APPLICABLE IN T HE ASSESSEES CASE AND THERE IS NO RISK INVOLVEMENT TO COMPENSATE THE PERSONAL GUARANTEE. THE COMPANY HAS CHOSEN TO MAKE THE PAYME NT OF GUARANTEE COMMISSION AS A SOURCE OF INCOME TO THE D IRECTORS AND THE FACTS OF THE HONBLE KARNATAKA HIGH COURT IN THE CA SE OF UNITED BREWERIES REPORTED IN 204 TAXMAN 244 ARE CLEARLY A PPLICABLE IN THE ASSESSEES CASE. ACCORDINGLY, WE HOLD THAT THE PAY MENT OF COMMISSION TO GUARANTORS IS NOT WHOLLY AND EXCLUSIVELY INCURRE D FOR THE PURPOSE OF BUSINESS AND IS NOT ALLOWABLE DEDUCTION U/S. 37(1) OF INCOME TAX ACT. ACCORDINGLY, THE ADDITION MADE BY THE AO IS CONFIRM ED AND THE REVENUES APPEAL ON THIS GROUND IS ALLOWED. 8.0 THE THIRD ISSUE IS RELATED TO DISALLOWANCE MADE BY THE AO ON ACCOUNT OF COMMISSION PAID TO JOHN BRUCE (UK) LTD. THE AO INVOKED THE PROVISIONS SECTION 40A(2)(A) AND ALSO HELD THAT THE EXPENDITURE WAS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PUR POSE OF BUSINESS. 8.1 THE ASSESSEE COMPANY HAS PAID A COMMISSION T O M/S JBUK FOR THE A.Y 2010- 11 TO 2012-13 AS FOLLOWS: SL. NO. ADDITIONS A.Y 2010 - 11 A.Y 2011 - 12 A.Y 2012 - 13 1 SALES COMMISSION PAID TO M/S.JOHAN BRUE(UK) LTD. 97,42,673 130,80,795 1,94,97,197 MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 17 - : 8.2 MR. JOHN BRUCE IS HOLDING 22.22% OF SHARES IN T HE ASSESSEES COMPANY AND HE IS SUBSTANTIALLY OWNING THE JBUK LTD . THE COMMISSION WAS BEING PAID @5% OF FOB VALUE OF THE SALES. THE A O DISALLOWED THE COMMISSION PAID TO JOHN BRUCE (UK) LTD., ON THE FOL LOWING GROUNDS. I) AS MR.SERGEY PROKHOROV WAS ALREADY BEING PAID COMMISSION FOR SALES TO RUSSIA THEREBY MAKING COMMISSION PAID TO J BUK-THROUGH MR.JOHN BRUCE, A SHAREHOLDER WITH A SHAREHOLDING OF 22.22%-HIGHLY QUESTIONABLE. II) IT IS ALSO QUESTIONABLE AS TO WHY MR.JOHN BRUCE WAS PAID COMMISSION WHEN THE ASSESSEE COMPANY CLAIM S TO BE A BENEFICIARY OF JBUK LTD., A COMPANY IN WHICH HE IS INTERESTED IN. III) IT WAS ALSO NOTED THAT HUGE COMMISSIONS WERE PAID TO BOTH MR.JOHN BRUCE AND MR.PARTHASARATHY WHO HOLD SUBSTANTIVE STAKE IN THE ASSESSEE COMPANY AND NOTHING PREVENTED THEM FROM GA INING PERSONAL BENEFITS FROM THE ASSESSEE. IV) THE ASSESSEE FAILED TO PRODUCE DETAILS WITH REG ARD TO COPIES OF AGREEMENT AND CORRESPONDENCE BETWEEN THE ASSESSEE AND JBUK LT D.,/ MR.JOHN BRUCE, APPROVAL OF BOARD/SHAREHOLDERS, FINANCIAL IN TEREST OF MR.JOHN BRUCE IN JBUK LTD., AND SHARE OF SALE TO KAMAZ, RUS SIA, OF JBUK LTD., ALONG WITH PURCHASE AND SALE PRICE OF JBUK TO KAMAZ OF THEPRODUCTS SUPPLIED BYTHE ASSESSEE. V) WITHOUT PREJUDICE TO THE ABOVE THE COMMISSION PA ID TO JBUK LTD., FALLS UNDER THE DEFINITION OF FEES FOR TECHNICAL SE RVICES. 8.3 AGGRIEVED BY THE ORDER OF THE AO, DEPARTME NT CARRIED THE APPEAL BEFORE THE LD.CIT(A). ON APPEAL, THE LD.CIT( A) DELETED THE ADDITION. THE LD.CIT(A) IN HIS ORDER OBSERVED THAT THE ASSESSEE PRODUCED COPIES OF AGREEMENT WITH M/S.JOHN BRUCE (U K) LTD. JBUK MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 18 - : LTD. WAS APPOINTED AS THE AUTHORIZED AGENT OF THE A SSESSEE FOR SALE OF ITS PRODUCTS TO KAMAZ,RUSSIA AND BOOWAN, SOUTH KOR EA, AS PER THE AGREEMENTS DATED 09.02.2008 AND 01.10.2008 RESPECTI VELY. THE COMMISSION WAS PAID FOR PROMOTION OF SALES TO THE A BOVE MENTIONED COMPANIES AND THE COMMISSION WAS PAYABLE TO JBUK LT D., AFTER FULL REALIZATION OF THE EXPORT PROCEEDS BY THE ASSESSEE AS SPELT OUT IN THESE CONTRACTS. SAMPLE DETAILS OF EXPORT PROCEEDS RECEI VED AND THE PAYMENTS OF COMMISSION MADE THEREAFTER WERE FURNISH ED BY THE ASSESSEE IN SUPPORT OF ITS CONTENTION BEFORE THE LD .CIT(A) AND BEING SATISFIED WITH THE EXPLANATION, DELETED THE DISALLOWANCE MADE BY THE AO. 8.4 BEING AGGRIEVED BY THE ORDER OF THE LD. CIT(A) THE REVENUE FILED APPEAL BEFORE US. THE LD.D.R HAS ARGUED THAT THE JB UK LTD IS FOREIGN COMPANY IN WHICH MR.JOHN BRUCE IS HOLDING SUBSTANTI ALLY. MR. JOHN BRUCE IS HOLDING 22.22% STAKE IN THE ASSESSEE COMPA NY AND PAID COMMISSION WITHOUT RENDERING ANY SERVICES. FURTHER DR ALSO STATED THAT THE ASSESSEE COMPANY HAS NOT FURNISHED ANY DET AILS CALLED FOR BY THE AO TO SUPPORT OR SUBSTANTIATE THE SERVICES REND ERED BY THE JBUK. MERE AGREEMENTS AND THE DETAILS OF EXPORT COMMISSIO N ARE NOT CONCLUSIVE PROOF OF THE SERVICES RENDERED BY THE JB UK WITHOUT SUPPORTING DOCUMENTS. THE DR FURTHER ARGUED THAT TH ERE WAS NO EVIDENCE TO SUPPORT WHETHER THE SALES WERE MADE THR OUGH THE JBUK LTD OR NOT? THE DR ARGUED THAT THE ASSESSEE IS PAYI NG THE COMMISSION MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 19 - : ON ENTIRE EXPORT SALES AS IF THE SAME WERE THE RE SULT OF THE EFFORTS OF JBUK WITHOUT ANY DOCUMENTARY PROOF. 8.5 ON THE OTHER HAND, LD.A.R ARGUED THAT THE ASS ESSEE PAYS JOHN BRUCE (UK) LTD., IN RELATION TO KAMAZ,RUSSIA, THE C OMMISSION @ 5%, WHICH WAS BASED ON FOB VALUE OF SALES DIRECTLY DONE BY THE ASSESSEE. THE RESERVE BANK OF INDIA HAD PREVIOUSLY LIMITED TH E COMMISSION PAYABLE TO OVERSEAS AGENTS @ 12.5% TO OVERSEAS AGEN TS. THIS WAS ALSO MAINTAINED BY THE CUSTOMS AUTHORITIES AS REASO NABLE. THE ASSESSEE SUBMITTED THAT THE PAYMENT OF COMMISSION IS MUCH LOWER THAN THE GOVERNMENT APPROVED RATE. FURTHER, HE ARGU ED THAT THE PAYMENT OF COMMISSION WAS TO THE COMPANY, BUT NOT T O AN INDIVIDUAL AS CONTENDED BY THE AO. SUBSTANTIAL WORK WAS DONE BY JOHN BRUCE (UK) LTD IN RESPECT OF EXPORT SALES MADE BY THE ASS ESSEE. THE A.R SUBMITTED THAT THE DETAILED SUBMISSIONS WERE MADE B Y THE ASSESSEE BEFORE THE AO TO JUSTIFY THE PAYMENT OF COMMISSION INCLUDING THE WORKINGS THEREOF, COPIES OF INVOICES AND PROOF OF P AYMENT AND SUBMITTED BOARD RESOLUTIONS EVIDENCING THE PAYMENT. JBUK HAS ALSO RESEARCHED ALL THE MARKETS FOR ASAS OUTSIDE INDIA, BOTH AFTER MARKET AND ORIGINAL EQUIPMENT (OE), AND DEVELOPED THE NEC ESSARY MARKETING MATERIAL INCLUDING, BUT NOT LIMITED TO, A WEBSITE, CATALOGUE, BROCHURES, FITTING AND SERVICING INSTRUCTIONS. JBUK EXHIBITED THE ASAS AT MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 20 - : APPROPRIATE INTERNATIONAL TRADE FAIRS ALL AROUND TH E WORLD AND CONTINUES TO DO SO. IN THE INTERNATIONAL TRADE FAIR S JBUK PROVIDES PRINTED BROCHURES, PRICE LIST, NEW PRODUCT BRIEFING S, ETC. JBUK MAINTAINS COMMUNICATION WITH THE EXISTING ARID POTE NTIAL CUSTOMERS TO EXPLAIN THE PRODUCT AND ALSO CHECK THE CUSTOMERS F UTURE REQUIREMENTS AND GATHERS MARKET INTELLIGENCE FOR FUTURE PRODUCTS . JBUK ALSO OFFERS FULL PRODUCT LIABILITY INSURANCE AND FLEXIBLE BANKI NG ARRANGEMENTS TO ALL ITS CUSTOMERS. ALTHOUGH THESE CAN NOW BE PROVIDED B Y THE ASSESSEE THEMSELVES, THEY WERE NOT AVAILABLE IN INDIA UNTIL RELATIVELY RECENTLY. THUS JBUK FACTUALLY HAS SHAPED THE OVERALL DIRECTIO N OF THE ASSESSEE WITH REGARD TO EXPORTS - FROM MAKING RECOMMENDATION S HELPING IN FURTHER TECHNOLOGICAL ADVANCES, SUGGESTING NEW PROD UCTS, PROPOSING NEW MARKET/MARKETING INITIATIVES AND COUNSELLING. 8.6 THE A.R STATED THAT AS FAR AS RUSSIA AND KAMA Z ARE CONCERNED, JBUK EXHIBITS THE ASSESSEES PRODUCTS AT TRADE FAIR S IN ST.PETERSBURG AND MOSCOW DEVELOPED APPROPRIATE MARKETING LITERATU RE IN RUSSIAN FOR THOSE FAIRS. THE ASSESSEES CURRENT BUSINESS IN RUS SIA WAS BUILT ON THE CONTACTS OF JBUK MADE AT THOSE EXHIBITIONS. THE A.R BROUGHT OUR NOTICE THAT SPECIFICALLY JBUK DOES THE FOLLOWING T O PROPEL THE ASSESSEES BUSINESS WITH KAMAZ: (I) SCHEDULES REGUL AR VISITS TO KAMAZ; (II) SCHEDULES REGULAR TRAINING FOR LOCAL TEAM TO D EAL WITH KAMAZ; (III) MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 21 - : HAS A TIMETABLE FOR REGULAR REVIEWS WITH THE ASSESS EE IN RELATION TO KAMAZS BUSINESS AND IN LIGHT OF DISCUSSIONS WITH K AMAZ IN SUCH REVIEWS, JBUK SETS PRODUCT PERFORMANCE STANDARDS/RE VISE THEM REGULARLY WHEN MARKET CONDITIONS CHANGE; (IV) PROVI DED BACK-UP SERVICE TO KAMAZ (V) GETS THE USEFUL FEEDBACK AND R ELEVANT INFORMATION. 8.7 THE A.R FURTHER STATED THAT THE JBUK HAS INVES TED (AND CONTINUES TO INVEST) A GREAT DEAL OF TIME AND RESOU RCES TO DEVELOP MAINTAIN STRONG RELATIONSHIPS WITH KAMAZ WHICH RESU LTS IN A STABLE CONTRACT AND A BENEFICIAL PRICING FOR THE ASSESSEE. IT SHOULD BE NOTED THAT SINCE JBUK IS AN EUROPEAN COMPANY, KAMAZ TENDS TO TRUST JBUK BECAUSE OF THE TRUST THAT RUSSIAN COMPANIES HAVE TO WARDS EUROPEAN COMPANIES AS COMPARED TO SMALL INDIAN COMPANIES LIK E THE ASSESSEE. IT SHOULD ALSO BE NOTED THAT THE ASSESSEE DOES NOT HAVE IN-HOUSE LANGUAGE CAPABILITY OR CULTURAL KNOWLEDGE TO DO BUS INESS WITH A RUSSIAN COMPANY LIKE KAMAZ I.E. DEALING WITH SUPPLI ERS WHO ONLY SPEAK RUSSIAN LANGUAGE AND ALSO DEAL WITH A FOREIGN CULTU RE WHICH IS TOTALLY DIFFERENT FROM DEALING WITH DOMESTIC SUPPLIERS (WHI CH THE ASSESSEE IS USED TO). FURTHER, JBUK DOES THE ABOVE WORK ONLY WI TH A LIMITED OPERATIONAL SUPPORT FROM THE ASSESSEE. THE A.R HAS FILED A DETAILED WRITTEN SUBMISSIONS AND BROUGHT TO OUR NOTICE THE ADVANTAGES TO THE MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 22 - : ASSESSEE WITH JBUK IN RELATION TO KAMAZ BUSINESS AS FOLLOWS: (I) THE ASSESSEE HAS AVOIDED RECRUITMENT, TRAINING AND PAYR OLL COSTS OF USING ASSESSEES OWN EMPLOYEES IN THE RUSSIAN MARKET; (II ) JBUK MARKET RESEARCH, PRICE NEGOTIATION, QUALITY ASSURANCE AND PRODUCT PRE- POSITIONING; (III) THE ASSESSEE TOOK ADVANTAGE OF J BUKS WELL PLACED POSITION OF SOLID RELATIONSHIPS WITH POTENTIAL BUYE RS IN THE EUROPEAN MARKET- IT WOULD HAVE TAKEN THE ASSESSEE YEARS TO B UILD-UP ITS OWN CONTACTS. 8.8 THE FOLLOWING ANNEXURE WERE FILED BY THE A.R BEFORE US (I) SOME OF THE MARKETING LITERATURE DEVELOPED BY JOHN BRUCE (UK) LTD (JBUK) IN RUSSIAN LANGUAGE FOR THE RUSSIAN MARKET. (II) A COPY OF PRODUCT BROCHURE DISPLAYING THE ASSE SSEES PRODUCTS. (III) A SAMPLE E-MAIL TO THE ASSESSEE WHICH IS TYPI CAL OF THE KIND OF INPUT AND SUPPORT JBUK OFFERED DURING THE NEGOTIATI ONS. (IV) SAMPLE COPIES OF ASSESSEES INVOICES TO JBUK F OR THE ORIGINAL PATTERNS AND TOOLING. (V) A PRINT-OUT OF THE JBUKS WEBSITE IN RUSSIAN HT TP://WWW.SLACKS.RU/ (VI) SALES INVOICE WISE DETAILS OF COMMISSION PAID TO JBUK. IN VIEW OF ABOVE SUBMISSION THE LD.A.R. CONTENDED T HAT THE PAYMENT OF COMMISSION TO JBUK IS JUSTIFIED AND THE LD.CIT(A) O RDERS BE UP HELD. 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE COMMISSION WAS PAID FOR SALE OF ITS PRO DUCTS TO KAMAZ, RUSSIA AND BOOWAN, SOUTH KOREA. AS PER AGREEMENTS DATED 09.02.2008 AND 01.10.2008, SERVICES RENDERED BY JOH N BRUCE (UK) LTD., TO PROMOTE THE SALE OF THE ASSESSEE COMPANYS PRODUCTS. THE ASSESSEE COMPANY HAS PAID THE COMMISSION TO JBUK LT D. THE ASSESSEE HAS SUPPLIED THESE PRODUCTS DIRECTLY TO IT S CUSTOMERS IN MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 23 - : RUSSIA AND SOUTH KOREA. THE ASSESSEE ALSO FURNISHE D THE DETAILS OF SALES MADE TO KAMAZ RUSSIA AND BOOWAN SOUTH KOREA. THE ASSESSEE ALSO SUBMITTED THAT M/S.JOHN BRUCE (UK) LTD., HAS P ROMOTED THE SALES OF THE COMPANY BY ARRANGING IN TRADE FAIRS AT RUSSI A. THE DETAILS OF SALES MADE WERE FURNISHED BY THE ASSESSEE. HOWEVER AS PER THE ASSESSMENT ORDER THE ASSESSEE COMPANY HAS NOT FURNI SHED THE INFORMATION CALLED FOR BY THE AO. EVEN THE AGREEMEN TS WERE NOT FURNISHED BEFORE THE AO . THE PAPER BOOK SUBMITTED BY THE AR IS NOT CERTIFIED BY EITHER ASSESSEE OR THE AR. THEREFORE, WE ARE OF THE OPINION THAT THE MATERIAL PLACED BEFORE THE BENCH IS NOT MA DE AVAILABLE TO THE AO. THE ASSESSEE HAD SUBMITTED THE DETAILS OF COMMI SSION PAID, AND THE INVOICE AMOUNTS, BUT NOT PLACED THE COPIES OF I NVOICES TO VERIFY WHETHER THE SALES WERE MADE THROUGH THE JBUK OR NOT ? THE LD.CIT(A) EXAMINED THE AGREEMENTS AND CAME TO CONCLUSION THA T THE EXPENDITURE WAS INCURRED FOR THE PURPOSE OF BUSINES S BUT HE HAS NOT GIVEN ANY OPPORTUNITY TO THE AO. THEREFORE WE ARE O F THE CONSIDERED OPINION THAT THIS ISSUE REQUIRES FURTHER VERIFICATI ON TO EXAMINE THE GENUINESS OF EXPENDITURE. THEREFORE WE DEEM IT FIT TO REMIT THE MATTER BACK TO THE AO. ACCORDINGLY WE DIRECT THE AO TO EXA MINE THE ISSUE DECIDE THE ISSUE AS PER LAW AND MERITS. MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 24 - : 10. PROFIT COMMISSION PAID TO PRIYA SRIRAM :THE NEXT ISSUE IS RELATED TO THE DISALLOWANCE MADE BY THE AO U/S.40A (2)(A) OF THE ACT AS PAYMENT OF PROFIT COMMISSION TO MS.PRIYA SRIRAM, D/O. MR.PARTHASARATHY. 10.1 THE ASSESSEE COMPANY HAS PAID SALARY AND PROFIT COM MISSION TO PRIYA SRIRAMAN THE DAUGHTER OF E.K.PARTHASARATHY FOR ASSESSMENT YEAR 2012-13 AMOUNTING TO ` 1,15,67,203/-. THE PROFIT COMMISSION WAS PAID IN ADDITION TO THE REGULAR FIXED SALARY OF ` 60,01,644/-. MR. E.K.PARTHASARATHY AND FAMILY IS HAVING 60.48% O F SHARE HOLDING IN THE COMPANY AND MR.PARTHASARATHY WAS THE CHAIRMAN A ND MANAGING DIRECTOR OF THE COMPANY WHO HAS BEEN PAID SALARY AN D PROFIT COMMISSION. THE ENTIRE BOARD OF DIRECTORS OF THE CO MPANY ARE THE FAMILY MEMBERS OF MR.PARTHASARATHY. MRS.PRIYA SRIRA M IS NEW TO THE COMPANY AND SHE IS THE DAUGHTER OF PARHASARATHY WHO WAS HAVING CONTROLLING STAKE IN THE COMPANY AND CAN INFLUENCE THE BUSINESS AND THE ENTIRE DECISION MAKING OF THE COMPANY. NO OTHER EMPLOYEE EXCEPT MR. PARTHASARATHY THE CMD OF THE COMPANY WAS PAID P ROFIT COMMISSION IN THE COMPANY, THOUGH THE NUMBER OF EMPLOYEES ARE WORKING IN THE COMPANY FOR YEARS TO GETHER IN VARIOUS SENIOR CAPAC ITIES. THEREFORE THE AO VIEWED THAT ONLY REASON FOR PAYMENT OF COMMISSIO N WAS SHE IS BEING A DAUGHTER OF THE CMD AND THERE WAS NO BUSINE SS EXPEDIENCY. FURTHER THE AO OBSERVED THAT THE SHE HAS NOT DONE A NY SPECIAL MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 25 - : SERVICES TO THE COMPANY AND ACCORDINGLY DISALLOWED THE EXPENDITURE OF ` 1,15,67,203/- COMMISSION PAID TO MRS. PRIYA SRIRAMA N. 10.2 THE ASSESSEE WENT ON APPEAL BEFORE THE CIT(A) AND LD. CIT (A) DELETED THE ADDITION HOLDING THAT AO CAN MA KE DISALLOWANCES UNDER SECTION 40A(2)ONLY WHEN WARRANTED AND WHEN CO NDITIONS OF THE SECTION ARE SATISFIED. THE LD.CIT(A) VIEWED THAT TH E PAYMENTS MADE TO HER ARE TO BE SEEN FROM A PRUDENT BUSINESS MANS V IEW POINT AND THE CASE DOES NOT WARRANT ANY SUCH DISALLOWANCE AND THE LD. CIT(A) HELD THAT COMMISSION EXPENDITURE INCURRED BY THE APPELLA NT IS REASONABLE AND ALLOWED THE ASSESSEES APPEAL. AGGRIEVED BY THE ORDER OF THE LD.CIT(A) THE DEPARTMENT IS IN APPEAL BEFORE US. 11. THE LD. DR SUPPORTED THE ASSESSMENT ORDER AND ARGUE D THAT THE COMPANY HAS ENGAGED THE SERVICES OF PRIYA SRIRA MAN(PS) FROM THE A.Y 2008-09 ONWARDS AND FIRST TIME THE COMMISSION W AS PAID IN 2011- 12.PRIOR TO THE A.Y 2011-12 MRS.PS WAS PAID ONLY SA LARY. THOUGH THE SALARY HAS BEEN INCREASED FROM ` 35.50 LACS TO ` 60.01 LACS IN THE A.Y 2011-12 ON WARDS COMMISSION WAS PAID ADDITIONALLY W ITHOUT GIVING ANY VALID REASON AND ADDITIONAL RESPONSIBILITY. THOUGH THERE WERE SEVERAL EMPLOYEES WORKING IN THE COMPANY IN VARIOUS SENIOR CAPACITIES NO COMMISSION OR INCENTIVE WAS PAID TO ANY OF THE STAF F. THEREFORE THE AR ARGUED THAT THERE IS NO BUSINESS NEED FOR THE PAYME NT OF COMMISSION MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 26 - : TO MRS P.S AND THE EXPENDITURE WAS NOT WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS. 12. ON THE OTHER HAND, THE LD A.R SUBMITTED THAT TH E SALARY COMPENSATION OF MRS.P.S CONSISTS OF (A) A FIXED POR TION OF MONTHLY SALARY AND (B) A VARIABLE PORTION (PROFIT COMMISSIO N )@5% OF THE PROFITS FROM THE A.Y 2011-12 AND 10% FROM ASSESSMEN T YEAR 2013-14 ON WARDS ANNUALLY. THE VARIABLE PORTION IS LINKED T O THE OVERALL PERFORMANCE OF THE COMPANY COMPUTED WITH REFERENCE TO THE PROFITS REFLECTED IN THE AUDITED ACCOUNTS OF THE ASSESSEE. THIS VARIABLE PORTION VARIES FROM YEAR TO YEAR DEPENDING ON THE PERFORMAN CE OF THE ASSESSEE. THE A.R. FURTHER SUBMITTED THAT MRS.PRIYA SRIRAMAN IS HIGHLY EDUCATED HAVING MBA DEGREE AND HAVING VAST EXPERIEN CE AND WORKED WITH VARIOUS OTHER COMPANIES AND UNDERTAKEN THE RES PONSIBILITY OF OPERATIONS OF THE COMPANY AND EXECUTION OF THE COMP ANYS LONG TERM STRATEGY WITH A VIEW TO CREATING SHAREHOLDER VALUE. HER ROLE ALSO ENTAILS BEING RESPONSIBLE FOR ALL MANAGEMENT DECISIONS AND FOR IMPLEMENTING THE ASSESSEE COMPANYS SHORT TERM PLANS. HE FURTHER EXPLAINED THAT SHE PLAYS VITAL ROLE IN PRODUCTION, PLANNING OPERAT IONS DOMESTIC AND EXPORT MARKET. FURTHER A.R MADE THE WRITTEN SUBMISS IONS IN GREAT DETAIL REGARDING THE SERVICES RENDERED BY HER TO TH E COMPANY ALONG WITH THE COPY OF BOARD RESOLUTION DATED 01/02/2011. MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 27 - : 13. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS PLACED BEFORE US. THE LD.CIT(A)HELD THAT THE EXPEND ITURE WAS DISALLOWED U/S 40A(2) OF INCOME TAX ACT AND HELD TH E PAYMENT OF EXPENDITURE WAS REASONABLE. THE LD.A.R ARGUED THAT THE AO HAS NOT MADE OUT CASE FOR EXCESSIVE PAYMENT WITH REGARD TO EITHER FAIR MARKET VALUE OF THE SERVICES OR FACILITIES OR LEGITIMATE N EEDS OF THE BUSINESS OF THE COMPANY OR BENEFITS DERIVED OR ACCRUING TO THE ASSESSEE ON RECEIPT OF SUCH SERVICES OR FACILITIES. FURTHER A.R HAS EXP LAINED IN GREAT DETAIL THE PROFESSIONAL QUALIFICATIONS AND THE CONTRIBUTIO N MADE BY THE DIRECTOR PRIYA SRIRAM(PS) IN MANAGING THE AFFAIRS S UCCESSFULLY OF THE APPELLANT COMPANY. THE EXPLANATION SUBMITTED BY THE A.R IS IN GENERAL IN NATURE BUT NOT SPECIFIC, HOW THE COMPANY GOT THE INCREMENTAL BENEFIT. THE AO DISALLOWED THE EXPENDITURE HOLDING THAT THE COMMISSION WAS PAID BECAUSE SHE IS THE DAUGHTER OF THE MANAGING DIRECTOR E.K.PARTHASARATHY AND SHE HAS NOT RENDERED ANY SPECIAL SERVICES TO THE COMPANY WHICH REQUIRE PAYMENT OF PR OFIT COMMISSION. THE BOARD HAS PASSED THE RESOLUTION ON 01/02/2011 J UST BEFORE COMPLETION OF THE YEAR ENDING. IN THE BOARD RESOLUT ION THERE WAS NO MENTION OF ADDITIONAL RESPONSIBILITIES GIVEN TO HER OR RENDERED BY HER. THE A.R HAS NOT FURNISHED THE APPOINTMENT ORDER OF MRS.PRIYA SRIRAM SPECIFYING THE JOB GIVEN TO HER AND THE RESPONSIBIL ITIES ENTRUSTED TO HER FOR PAYMENT OF COMMISSION. EVEN THE PAPER BOOK FILE D BY THE A.R DOES MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 28 - : NOT SPECIFY THE EXTRA SERVICES RENDERED BY HER. SHE IS EMPLOYED IN THE COMPANY FROM THE A.Y 2008-09 AND PAID FIXED SALARY AND COMMISSION AS FOLLOWS: A.Y SALARY COMMISSION 2008-09 17.00 LACS NIL 2009-10 18.00 LACS NIL 2010-11 35.00 LACS NIL 2011-12 60.01 LACS 123.95 LACS 2012-13 60.01.00 LACS 115.67 LACS FOR THE A.Y 2011-12 THOUGH THE ASSESSEE HAS PAID C OMMISSION THE A.O HAS NOT MADE ANY DISCUSSION AND ALLOWED THE PAY MENT OF COMMISSION. IT APPEARS THAT THE AO HAS NOT EXAMINED THE ISSUE. FOR THE A.Y YEAR UNDER CONSIDERATION THE A.O HAS MADE E LABORATE DISCUSSION AND DISALLOWED THE PAYMENT OF COMMISSION . THEREFORE THE FACTS OF THE A.Y 2011-12 CANNOT BE MADE APPLICABLE FOR THE A.Y 2012-13. THOUGH SHE IS WORKING IN THE COMPANY FROM 2008-09, FOR THE FIRST TIME THE COMMISSION WAS PAID TO HER FROM THE A.Y.2011-12 DESPITE THE SALARY HAS INCREASED FROM ` 35.00 LACS TO ` 60.00 LACS .THE REASONS FOR PAYMENT OF COMMISSION WAS NOT EXPLAINED BY THE A.R IN SPITE OF HUGE INCREASE IN SALARY. THE COMPANY WAS A LREADY PAYING THE COMMISSION TO MR.E.K.PARTHASARATHY FOR OVERALL MANA GEMENT AND IMPROVEMENT AND GROWTH OF THE COMPANY. IN THE EARLI ER PARAGRAPHS THE AR HAS EXPLAINED IN GREAT DETAIL HOW MR. PARTHA SARATHY HAS TAKEN THE COMPANY TO THE NEW HEIGHTS. ANY ADDITIONAL PAY MENT OF PERFORMANCE BASED COMMISSION SHOULD BE SUPPORTED BY THE ADDITIONAL MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 29 - : SERVICES RENDERED BY THE NEW RECIPIENT AND IMPROVEM ENT IN PERFORMANCE AND INCREMENTAL BENEFIT DERIVED BY THE COMPANY BUT NOT AT THE WHIMS AND FANCIES OF THE MANAGEMENT OF THE C OMPANY. THOUGH THE A.R. ARGUED THAT THERE IS NO TAX AVOIDANCE AND IT WAS TAX NEUTRAL IT IS ALSO INCUMBENT UPON THE ASSESSEE TO EXPLAIN THE PAYMENT WAS IN THE BUSINESS INTEREST OF THE COMPANY. AS PER THE IN FORMATION FURNISHED BY THE A.R. THE TRADING RESULTS OF THE COMPANY BEFO RE PAYMENT OF COMMISSION TO MRS.PRIYA SRIRAM AND AFTER PAYMENT O F COMMISSION IS AS FOLLOWS: A.Y. TOTAL SALES RS.IN CRORES EXPORT SALES RS.IN CRORES PROFIT BEFORE TAX RS.IN CRORES 2010-11 143.18 37.50 17.47 2011-12 206.31 68.11 24.72 2012-13 237.81 75.73 23.27 13.1 CAREFUL ANALYSIS OF THE INFORMATION SHOWS THA T THOUGH THERE WAS INCREASE IN SALES DURING THE A.Y 2011-12 TO THE EXT ENT OF 63.13 CRORES INCREASE MANLY DUE TO JUMP IN EXPORT SALES FROM ` 37.50 CRORES TO ` 68.11 CRORES WHICH WAS MAINLY DUE TO FOREIGN AGENTS I.E JBUK AND MR. SERGEY PROKHOROV WHO WERE COMPENSATED SEPARATELY. THERE WAS A MARGINAL INCREASE IN DOMESTIC SALES FRONT WHICH CAN BE ATTRIBUTED TO GENERAL BUSINESS TREND, AND INCREASE IN PRICE RISE. SIMILARLY FOR THE A.Y MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 30 - : UNDER CONSIDERATION SALES HAVE INCREASED FROM ` 206.31 CRORES TO ` 237.81 CRORES GIVING RISE TO INCREASE IN SALES TO T HE EXTENT OF 7.62 CRORES IN EXPORT SALES AND 23.88 CRORES IN DOMESTIC SALES AGGREGATING TO ` 31.50 CRORES AND PROFIT BEFORE TAX HAS REDUCED FROM ` 24.72 CRORES TO ` 23.27 CRORES. IN THE CIRCUMSTANCES IT IS EVIDENT FR OM THE ABOVE TRADING RESULTS THAT THERE WERE NO ADDITIONAL EFFOR TS OR SERVICES RENDERED BY MRS.PRIYA SRIRAM TO MAKE THE PAYMENT OF PROFIT COMMISSION OVER AND ABOVE THE FIXED SALARY. SINCE T HE FIXED WAS ALREADY INCREASED FROM ` 35.50 LACS IN 2010-11 TO ` 60.01 LACS THERE WAS NO REASON FOR PAYMENT OF COMMISSION ON OVERALL PROF IT OF THE COMPANY WITHOUT INCREMENTAL BENEFIT. THOUGH THERE ARE THREE WHOLE TIME DIRECTORS AND SENIOR OFFICERS WORKING IN THE COMPAN Y ONLY MRS. PRIYA SRIRAM WAS PAID PROFIT COMMISSION ON THE TOTAL PROF IT WITHOUT CONSIDERING AND EVALUATING THE INCREMENTAL BENEFIT DERIVED BY THE COMPANY. THE A.R HAS NOT SUBSTANTIATED THE ADDITION AL RESPONSIBILITIES OR SERVICES GIVEN TO HER AND DISCHARGED BY HER WITH THE TERMS AND CONDITIONS OF EMPLOYMENT. THEREFORE WE ARE IN AGREE MENT WITH THE AO THAT NO ADDITIONAL SERVICES WERE RENDERED BY MRS. P RIYA SRIRAM FOR PAYMENT OF PROFIT COMMISSION AND THE PAYMENT WAS NO T IN THE BUSINESS INTEREST. ACCORDINGLY WE SET ASIDE THE ORD ER OF CIT(A) AND RESTORE THE ORDER OF THE AO. THE REVENUES APPEAL O N THIS GROUND IS ALLOWED. MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 31 - : ASSESSEES APPEALS IN ITA NO . 2259,2260 & 2261/MDS./2015 14. THE COMMON GROUND IN ALL THESE THREE ASSESSEES AP PEAL ARE RELATED TO DISALLOWANCE MADE BY THE AO U/S.40A(2)( A) OF THE ACT AS PAYMENTS OF RENT IN RESPECT OF ACCOMMODATION LEASED FROM MR.SRIRAM SIVARAM SON IN LAW OF MR.E.K.PARTHASARATHY CMD OF T HE COMPANY AMOUNTING TO ` 40,16,160 FOR A.Y. 2010-11, ` 40,16,160 FOR A.Y. 2011- 12 & ` 45,18,180 FOR A.Y. 2012-13, , WHICH WAS CONFIRMED B Y THE LD.CIT(A). 15. DURING ASSESSMENT PROCEEDINGS, THE AO FOUND TH AT THE ASSESSEE COMPANY PAID RENT TO ITS EXECUTIVE DIRECTOR MR.SRIR AM SIVARAM FOR PROVIDING A RENT FREE ACCOMMODATION AS PER THE AG REEMENT WITH MR.SRIRAM SIVARAM, WHO HAPPENS TO BE THE SON-IN-LAW OF MR.PARTHASARATHY,M.D. THE AO WAS OF THE VIEW THAT THE RENT PAID BY THE ASSESSEE COMPANY IS NOTHING BUT SALARRY/COMPENS ATION PAID IN ANOTHER FORM OF DISTRIBUTING THE PROFITS. MR.SRIRAM SIVARAM HAS ALREADY BEEN DULY COMPENSATED WITH A FIXED SALARY BESIDES P ERQUISITES, WHICH ARE MUCH HIGHER IN COMPARISON TO WHAT HAS BEEN PAID TO MR.PARTHASARATHY, WHO HAD PUT IN DECADES OF SERVICE WITH ALL HIS EXPERTISE TO RUN THE BUSINESS. MR.SRIRAM SIVARAM WO ULD BE RESIDING IN THE SAME HOUSE EVEN IF HE WERE NOT THE DIRECTOR IN THE ASSESSEE COMPANY. FURTHER, LD. ASSESSING OFFICER OBSERVED TH AT MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 32 - : MR.PARTHASARATHY, HAVING SUBSTANTIVE VOTING RIGHTS IN THE ASSESSEE COMPANY ALONG WITH HIS FAMILY MEMBERS, HAS ONLY MAD E THE ASSESSEE TO INCUR THIS EXPENDITURE. THE AO POINTED OUT THAT THE ASSESSEE FAILED TO THE PRODUCE NECESSARY EVIDENCE THAT THE EXPENDIT URE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSIN ESS. THUS, AO DISALLOWED THE RENT PAID TO MR.SRIRAM SIVARAM IN TH E RESPECTIVE ASSESSMENT YEARS MENTIONED HEREIN ABOVE. AGGRIEVED BY THE ORDER OF LD. ASSESSING OFFICER, THE ASSESSEE CARRIED APPEAL BEFORE LD.CIT(A). 16. ON APPEAL, LD.CIT(A) OBSERVED THAT THE ASSESSE E COMPANY HAS TAKEN ON RENT, THE RESIDENTIAL PREMISES OWNED BY MR .SRIRAM SIVARAM, DIRECTOR OF THE COMPANY AT 1,PARTHASAATHY GARDEN, K ASTURI RANGAN ROAD, ALWARPET, CHENNAI-18, WHICH IS IN A PRIME ARE A OF CHENNAI HAVING BUILT-UP AREA OF 7,500 SQ.FT. THE LD.CIT(A) OBSERVED THAT THE RENT WORKS OUT TO ` 46 PER SQ. FT. LD.CIT(A) OBSERVED THAT MR.SRIRAM SIVARAM HAS BEEN PROVIDED WITH COMPANY LEASED ACCOM MODATION AS PER THE TERMS OF CONTRACT WITH MR.SRIRAM SIVARAM. A CCORDING TO LD.CIT(A), THE AO WAS OF THE OPINION THAT THERE IS NO BUSINESS EXIGENCY OR NECESSITY TO HIRE THE HOUSE OF MR.SRIRA M SIVARAM AND AGAIN LET THE SAME TO BE USED BY HIM AS A COMPANY L EASED ACCOMMODATION. THE LD.CIT(A) OBSERVED THAT THIS TR ANSACTION INVOLVES LEAKAGE OF REVENUE AS THE COMPANY LEASED ACCOMMODAT ION IS TAXED AS A PERQUISITE IN THE HANDS OF MR.SRIRAM SIVARAM AT A LOWER RATE. FURTHER, MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 33 - : LD.CIT(A) OBSERVED THAT THE ENTIRE TRANSACTION IS N OTHING BUT AN ARRANGEMENT WHEREIN A BENEFIT IS BEING BESTOWED UPO N A DIRECTOR RATHER THAN THE ASSESSEE COMPANY DERIVING ANY BENEF IT. THE PROVISIONS OF THE SECTION 40A(2) HAVE BEEN ENACTED WITH THE PU RPOSE OF CURBING SUCH PRACTICES ONLY. HENCE, THE LD.CIT(A) UPHELD TH E DISALLOWANCE MADE BY THE AO. 17. BEFORE US, LD.A.R ARGUED THAT THE COMPANY HAS PROVI DED LEASED ACCOMMODATION TO THE DIRECTOR. IT IS NECESSARY IN T HE INTEREST OF COMPANY TO PROVIDE THE LEASED ACCOMMODATION TO THE DIRECTOR. THE RENT PAYABLE IS COMPARABLE WITH THE MARKET RENT AND IT IS MUCH LOWER THAN THE COMPARABLE BUILDINGS IN THE VICINITY. THER EFORE, LD.A.R VEHEMENTLY ARGUED THAT THE LD.CIT(A) HAS ERRED IN S USTAINING THE ADDITION MADE BY THE AO. 18. ON THE OTHER HAND, LD.D.R ADVANCED ARGUMENT TH AT IN A COMPANY, NO OTHER EMPLOYEE WAS PAID SUCH RENT BY TA KING LEASED ACCOMMODATION. EVEN OTHERWISE, THE DIRECTOR WOULD R ESIDE IN THE SAME HOUSE, WHICH WAS TAKEN ON LEASE. SINCE THE COMPANY IS A FAMILY RUN UNIT AND THE DIRECTORS ARE THE FAMILY MEMBERS, THE PAYMENT WAS MADE IN THE FORM OF RENT AND THE RENT PAID IS TAXABLE PE RQUISITE IN THE HANDS OF MR.SRIRAM SIVARAM AT A LOWER RATES. THEREFORE, L D.D.R ARGUED THAT THE LD.CIT(A) HAS RIGHTLY CONFIRMED THE ADDITION. MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 34 - : 19. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. THOUGH THE ASSESSEE HAS ARGUED THAT THE REN T PAID IS REASONABLE COMPARING THE OTHER RESIDENTIAL PREMISES THE ASSESSEE HAS NOT MADE OUT A CASE FOR TAKING THE ACCOMMODATION O N LEASE FROM THE DIRECTOR AND LEASING OUT TO HIM. THERE IS NO OTHER PERSON, WHO HAS BEEN PAID THE RENT IN THE SIMILAR MANNER IN THE COM PANY. MR.SRIRAM SIVARAM IS A WHOLE TIME DIRECTOR AND THERE ARE OTHE R DIRECTORS BUT NO SUCH FACILITY WAS EXTENDED TO ANY OF THE OTHER DIRE CTORS. THE LEASED ACCOMMODATION IS A TAXABLE PERQUISITE IN THE HANDS OF MR.SRIRAM SIVARAM, WHICH IS MUCH LOWER IN RATE. MR.SRIRAM SIV ARAM IS A DIRECTOR OF THE COMPANY AND DRAWING SALARY. SECTION 40A(2) WAS BROUGHT INTO ACT TO CURB THE INCIDENCE OF TAX EVASION, CURBING S UCH PRACTICE OF DISTRIBUTING PROFITS WITHOUT MAKING THE PAYMENT OF LEGITIMATE TAX. THEREFORE, WE AGREE WITH THE CIT(A)S ORDER AND THE ENTIRE TRANSACTION IS NOTHING BUT AN ARRANGEMENT WHEREIN BENEFIT IS BE STOWED UPON INDIVIDUAL OF THE FAMILY RATHER THAN THE COMPANY DE RIVING ANY BENEFIT. THEREFORE, AO HAS RIGHTLY DISALLOWED THE EXPENDITUR E AS UNREASONABLE AND WE UPHELD THE ORDER OF LD.CIT(A) AND DISMISS TH E ASSESSEES GROUND ON THIS ISSUE FOR ALL THE ASSESSMENT YEARS. MADRAS ENGINEERING INDUSTRIES PVT. LTD. :- 35 - : 20. IN THE RESULT, THE APPEALS OF THE REVENUE ARE P ARTLY ALLOWED AND ALL THE APPEALS OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED ON 21 ST SEPTEMBER, 2016, AT CHENNAI. SD/ - SD/ - ( . . . ) (N.R.S. GANESAN) / JUDICIAL MEMBER ( . . !' $% ) (D.S.SUNDER SINGH) & / ACCOUNTANT MEMBER '! / CHENNAI (' / DATED: 21 ST SEPTEMBER, 2016 K S SUNDARAM ' ) $* +* / COPY TO: 1 . ,- / APPELLANT 3. . () / CIT(A) 5. *1 ) 2 / DR 2. )3,- / RESPONDENT 4. . / CIT 6. 4 / GF