The DCIT, Circle-3(1), Visakhapatnam V. M/s Andhra Pradesh Fibres Ltd., Salur

ITA 148/VIZ/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 7222 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 10 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-02-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 24-01-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 05-03-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: TH LUCAS PETER
• Assessee Lawyers: D BALAJI
• Keywords: Business expenditure
• Section: 131

Judgement Text

ITA NOS.222 223 OF 09 AND 148 OF 2010 ANDHRA PRADESH FIBRES LTD SALURU PAGE 1 OF 5 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI BR BASKARAN, ACCOUNTANT MEMBER ITA NOS. 222 & 223/VIZAG/2009 ASSESSMENT YEARS:2005-06 & 2006-07 ACIT CIRCLE-3(1), VISAKHAPATNAM VS. ANDHRA PRADESH FIBRES LTD., SALURU (APPELLANT) (RESPONDENT) PAN NO: AAACA 4036 F ITA NOS. 148/VIZAG/2010 ASSESSMENT YEAR:2007-08 DCIT CIRCLE-3(1), VISAKHAPATNAM VS. ANDHRA PRADESH FIBRES LTD., SALURU (APPELLANT) (RESPONDENT) PAN NO: AAACA 4036 F APPELLANT BY: SHRI T.H. LUCAS PETER, CIT (DR) RESPONDENT BY: SHRI D. BALAJI, CA ORDER PER BENCH: THESE THREE APPEALS OF THE REVENUE ARE DIRECTED AG AINST THE ORDERS PASSED BY LEARNED CIT(A),VISAKHAPATNAM AND THEY REL ATE TO THE ASSESSMENT YEARS 2005-06 TO 2007-08. 2. THE DISALLOWANCE OF PREMIUM PAID ON KEY MAN INS URANCE POLICY MADE BY THE ASSESSING OFFICER IN ALL THE THREE YEARS UNDER CONSIDERATION, HAVING BEEN DELETED BY LEARNED CIT(A), THE REVENUE IS IN APPEAL BEFORE US ASSAILING THE DECISION OF LEARNED CIT(A). 3. THE FACTS RELATING TO THE ISSUE ARE STATED I N BRIEF. THE ASSESSEE COMPANY IS CARRYING ON THE BUSINESS OF MANUFACTURE AND SALE OF JUTE TWINE, YARN SACKING CLOTH AND BAGS. IN EACH OF THE THREE Y EARS UNDER ITA NOS.222 223 OF 09 AND 148 OF 2010 ANDHRA PRADESH FIBRES LTD SALURU PAGE 2 OF 5 CONSIDERATION, THE ASSESSEE COMPANY PAID PREMIUM OF RS.20,92,660/- ON KEY MAN INSURANCE POLICY TAKEN IN THE NAME OF ONE O F THE DIRECTORS OF THE COMPANY NAMED SHRI T.SAPTHAGIRI. IT CLAIMED THE SA ID PAYMENT AS ITS BUSINESS EXPENDITURE. DURING THE COURSE OF ASSESSM ENT PROCEEDINGS, THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN HOW THE PAYMENT OF SAID PREMIUM IS JUSTIFIED. ACCORDING TO THE ASSESSING O FFICER THE ASSESSEE COULD NOT OFFER SATISFACTORY EXPLANATION AND HENCE THE SA ID CLAIM WAS DISALLOWED BY THE ASSESSING OFFICER IN ALL THE THREE YEARS. IN THE APPEAL PREFERRED BY THE ASSESSEE, THE LEARNED CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE. HENCE THE REVENUE IS IN APPEAL BEFORE US. 4. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBM ITTED THAT THE KEY MAN INSURANCE POLICY IS NORMALLY TAKEN ON THE LIFE O F THAT PERSON WHOSE SERVICES ARE CONSIDERED ESSENTIAL FOR THE BUSINESS OF THE COMPANY. SHRI T.SAPTHAGIRI, ON WHOSE LIFE THE SAID POLICY WAS TAK EN, IS ONLY A DIRECTOR OF THE COMPANY AND HE IS NOT EVEN A WORKING DIRECTOR. HE IS NOT PAID ANY SALARY BY THE COMPANY FOR HIS SERVICES. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE HAS FAILED TO PROVE THAT THE SAID T.SAPTHAGIRI IS A KEY MAN FOR THE COMPANY. HE FURTHER SUBMITTED THAT THE COMPANY IS CONTINUOUSLY INCURRING LOSSES AND IN THAT SITUATION THE RESPONSIBILITY IS PLACED UPON THE ASSESSEE TO JUSTIFY THE PAYMENT OF PREMIUM OF ABOUT RS.20.00 LAKHS ON THE LIFE OF A PERSON WHO IS NOT PROVED TO BE A KEY MAN. 5. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITT ED THAT THE DIRECTOR SHRI T.SAPTHAGIRI IS A KEY PERSON AND HE LOOKS AFTER PUR CHASES, SALES, LABOUR ISSUES AND ALSO DAY TO DAY AFFAIRS. HE IS THE OCC UPIER OF THE FACTORY BELONGING TO THE COMPANY FOR THE PURPOSES OF FACTOR IES ACT. HE FURTHER SUBMITTED THAT THE WORD KEY MAN IS NOT DEFINED UN DER THE INCOME TAX ACT AND AS PER THE CIRCULAR OF CBDT THE THE KEYMAN IS AN EMPLOYEE OR DIRECTOR WHOSE SERVICES ARE PERCEIVED TO HAVE A SIG NIFICANT EFFECT ON THE PROFITABILITY OF THE BUSINESS. HE FURTHER SUBMITTE D THAT THE SAID PERSON HAS ITA NOS.222 223 OF 09 AND 148 OF 2010 ANDHRA PRADESH FIBRES LTD SALURU PAGE 3 OF 5 TURNED THE LOSS MAKING COMPANY INTO A PROFITABLE ON E. HE ALSO CHAIRED THE BOARD MEETINGS AND ALSO THE MEETINGS HELD WITH TRAD E UNIONS. HE ALSO SUBMITTED THAT THE KEY MAN NEED NOT ALWAYS NECESS ARILY DRAW SALARY FROM THE COMPANY AND HIS QUALIFICATION OF A DIRECTOR COM BINED WITH HIS INVOLVEMENT IN THE BUSINESS ACTIVITIES SHOULD BE GI VEN DUE WEIGHTAGE. HE FURTHER SUBMITTED THAT SHRI T.SAPTHAGIRI IS A MAJOR SHARE HOLDER OF THE COMPANY AND THE FACT THAT HE ONLY APPEARED BEFORE T HE ASSESSING OFFICER IN RESPONSE TO THE SUMMON ISSUED UNDER SECTION 131 OF THE ACT GOES TO PROVE THAT HE IS THE KEY MAN FOR THE COMPANY. THE ASSESS ING OFFICER WITHOUT MAKING ANY DISCUSSION ABOUT ALL THESE PROCEEDINGS A ND DISALLOWED THE SAID CLAIM OF THE ASSESSEE WITH A CRYPTIC REMARKS, WHICH RENDERS THE ASSESSMENT ORDER AS A NON-SPEAKING ONE. ACCORDINGLY HE SUBMITT ED THAT THE LEARNED CIT(A) HAS PASSED A REASONED ORDER AND PLEADED THAT THE SAME SHOULD BE UPHELD. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND CARE FULLY PERUSED THE RECORD. THE ASSESSEE HAS PAID A SUM OF ABOUT RS20.00 LAKHS AS PREMIUM ON THE KEY MAN INSURANCE POLICY TAKEN ON THE LIFE OF A DIR ECTOR NAMED SHRI T.SAPTHAGIRI AND THE SAME HAS BEEN CLAIMED AS BUSIN ESS EXPENDITURE. DURING THE COURSE OF ASSESSMENT PROCEEDING, THE ASS ESSING OFFICER HAS ISSUED SUMMONS TO THE SAID DIRECTOR AND HE HAS FILE D A REPLY WHEREIN IT IS STATED THAT HE IS LOOKING AFTER THE DAY TO DAY TRAN SACTIONS, LABOUR MATTERS, PURCHASES, PRODUCTION PLANNING ETC AND THE DECISION S ON THE ABOVE MATTERS ARE TAKEN AFTER CONSULTING HIM ONLY. HOWEVER, THE CONTENTION OF THE DEPARTMENT IS THAT THE SAID PERSON IS NOT A WORKING DIRECTOR AND HIS CLAIM IS NOT SUPPORTED BY ANY EVIDENCE AND FURTHER HE IS NOT PAID ANY SALARY BY THE COMPANY. 6.1 IN VIEW OF THE ABOVE SAID CONTENTIONS OF TH E REVENUE, THE ASSESSEE WAS ASKED BY THE BENCH TO PRODUCE EVIDENCES THAT WO ULD JUSTIFY ITS CLAIM THAT SHRI T.SAPTHAGIRI IS A KEY MAN. THE ASSESSEE PRODUCED BEFORE US ITA NOS.222 223 OF 09 AND 148 OF 2010 ANDHRA PRADESH FIBRES LTD SALURU PAGE 4 OF 5 COPIES OF MINUTES OF BOARD MEETING TO SHOW THAT SHR I T.SAPTHAGIRI HAS CHAIRED THE BOARD MEETINGS. ON PERUSAL OF THE SAID COPIES OF MINUTES OF BOARD MEETINGS, WE NOTICE THAT SHRI T.SAPTAGIRI HAS CHAIRED IN MEETINGS NUMBERED AS 152, 157, 164, 165, 166, 168 AND 169, W HICH MEANS THAT OTHER DIRECTORS HAVE ALSO CHAIRED THE BOARD MEETING S. THUS IT IS NOT THE CASE THAT SHRI T.SAPTAGIRI ALONE CHAIRED ALL THE BO ARD MEETINGS AND HENCE THE COPIES OF MINUTES CAN NOT JUSTIFY THE CLAIM OF THE ASSESSEE. THE ASSESSEE HAS CLAIMED THAT THE SAID PERSON IS LOOKIN G AFTER DAY TO DAY TRANSACTIONS, PURCHASE, PRODUCTION PLANNING, LABOUR MATTERS ETC. HOWEVER, AS CONTENDED BY THE REVENUE, THE ASSESSEE COULD NOT FILE EVIDENCE IN SUPPORT OF SAID CLAIMS. THE ONLY EVIDENCE THAT WAS FILED WAS A COPY OF FACTORY LICENSE, WHEREIN THERE IS AN ENDORSEMENT RE GARDING TRANSFER OF LICENSE TO SHRI T.SAPTAGIRI. IN OUR VIEW, THE SAID DOCUMENT WOULD NOT BE SUFFICIENT TO PROVE THAT HE IS THE KEY MAN FOR TH E COMPANY. 6.2 THE LEARNED AUTHORISED REPRESENTATIVE PLACED RELIANCE ON THE MEMORANDUM EXPLAINING THE PROVISIONS IN THE FINANCE (NO.2) BILL, 1996 (220 ITR (ST.) 248 AT PAGE 271), WHEREIN IT WAS STATED T HAT THE KEY MAN IS AN EMPLOYEE OR A DIRECTOR WHOSE SERVICES ARE PERCEIVED TO HAVE A SIGNIFICANT EFFECT ON THE PROFITABILITY OF THE BUSINESS. ACCOR DINGLY IT WAS CONTENDED BY LEARNED A.R THAT THE PERCEPTION OF IMPORTANCE OF A PERSON IS SUFFICIENT TO DESIGNATE A PERSON AS A KEY MAN. IN OUR VIEW, THE SAID PERCEPTION HAS TO BE LOOKED INTO IN THE SECOND STAGE, THAT TOO ONLY A FTER CROSSING THE FIRST STAGE. IN OUR VIEW, THE ASSESSEE IS OBLIGED TO PROV E, IN THE FIRST STAGE, THAT THE SAID PERSON IS OFFERING SERVICES TO THE COMPANY WHICH HAS SIGNIFICANT EFFECT ON THE PROFITABILITY OF THE COMPANY AND THEN IN THE SECOND STAGE IT SHOULD PROVE THAT DISRUPTION OF HIS SERVICES IS PER CEIVED TO HAVE SIGNIFICANT IMPACT ON THE PROFITABILITY OF THE BUSINESS. IN THE INSTANT CASE, THE ASSESSEE COMPANY HAS FAILED TO PRODUCE ANY EVIDENCE IN SUPPO RT OF ITS CLAIM THAT HIS SERVICES ARE SIGNIFICANT FOR THE PROFITABILITY OF T HE COMPANY. HENCE, IN OUR VIEW, THE ASSESSEE HAS FAILED TO CROSS THE FIRST ST AGE ITSELF. IT WAS ALSO ITA NOS.222 223 OF 09 AND 148 OF 2010 ANDHRA PRADESH FIBRES LTD SALURU PAGE 5 OF 5 SUBMITTED THAT SHRI T.SAPTAGIRI IS A MAJOR SHARE HO LDER OF THE COMPANY. IN OUR VIEW, KEY MAN INSURANCE POLICY IS TAKEN FOR BUS INESS CONSIDERATION ONLY AND THE QUESTION OF MAJOR SHARE HOLDING DOES NOT AR ISE FOR THAT PURPOSE. IN VIEW OF THE FOREGOING DISCUSSIONS, WE ARE UNABLE TO AGREE WITH ORDERS OF LEARNED CIT(A). ACCORDINGLY, WE SET ASIDE THE ORDE RS OF LEARNED CIT(A) IN ALL THE THREE YEARS ON THIS ISSUE AND RESTORE THE A DDITIONS MADE BY THE ASSESSING OFFICER. 7. IN THE RESULT, ALL THE THREE APPEALS OF THE REVEN UE ARE ALLOWED. PRONOUNCED IN THE OPEN COURT ON 4 TH FEBRUARY, 2011. SD/- SD/- (SUNIL KUMAR YADAV) (B R BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PVV/SPS VISAKHAPATNAM, DATE:04-02-2011 COPY TO 1 THE ACIT, CIRCLE-3(1) VISAKHAPATNAM 2 THE DY.COMMISSIONER OF INCOME TAX, CIRCLE-3(1) VIS AKHAPATNAM 3 M/S ANDHRA PRADESH FIBRES LTD., JEEGIRAM VILLAGE, SALUR, VIZIANAGARAM 4 5 THE CIT 1, VISAKHAPATNAM THE CIT(A), VISAKHAPATNAM 6 THE DR, ITAT, VISAKHAPATNAM. 7 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM