ACIT, New Delhi V. M/s. Hive Communications (India) Pvt. Ltd., New Delhi

ITA 1649/DEL/2012

• Counselvise Citation: 164920114 RSA 2012
• Duration Of Justice: 6 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-11-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 06-11-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 09-04-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SATPAL SINGH SENIOR
• Keywords: Question of law; Fair market value

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH C : NEW DELHI) SHRI I.C. SUDHIR, JUDICIAL MEMBER AND BEFORE SHRI B.C. MEENA, ACCOUNTANT MEMBER ITA NO.1649/DEL./2012 (ASSESSMENT YEAR : 2008-09) ACIT, CIRCLE 12 (1), VS. M/S. HIVE COMMUNICATIONS (INDIA) PVT. LTD., NEW DELHI. 1, NIZAMUDIN EAST, NEW DELHI 110 013. (PAN : AAACH9022N) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI R.S. SINGHVI, CA REVENUE BY : SHRI SATPAL SINGH, SENIOR DR ORDER PER B.C. MEENA, ACCOUNTANT MEMBER : THIS APPEAL FILED BY THE REVENUE EMANATES FROM ORDE R OF CIT (APPEALS)-XV, NEW DELHI DATED 04.01.2012 FOR THE AS SESSMENT YEAR 2008-09. 2. THE ONLY ISSUE INVOLVED IN THE APPEAL IS AGAINST THE DELETION OF ADDITION OF RSS.24,70,000/- MADE BY ASSESSING OFFICER ON ACC OUNT OF PROFESSIONAL CHARGES U/S 40A(2)(B) OF THE INCOME-TAX ACT, 1961. 3. AT THE OUTSET OF THE HEARING, THE LD. AR SUBMITT ED THAT THE ISSUE IN APPEAL HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE I N ITS OWN CASE IN THE ASSESSMENT YEAR 2005-06 BY HON'BLE JURISDICTIONAL H IGH COURT VIDE ORDER ITA NO.1649/DEL./2012 2 DATED 08.07.2011. LD. AR ALSO MADE AVAILABLE A COP Y OF THE ORDER OF HON'BLE HIGH COURT DURING THE HEARING OF APPEAL ITSELF. 4. WE HAVE HEARD BOTH THE SIDES. THE QUESTION BEFO RE THE HON'BLE HIGH COURT FOR ANSWER WAS AS UNDER :- WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE TRIBUNAL WAS CORRECT IN LAW IN UPHOLDING THE DISALL OWANCE OF ` 13,20,000/- OUT OF REMUNERATION PAID TO MR. SUSHIL PANDIT BY INVOKING THE PROVISIONS OF SECTION 40A(2) OF THE AC T? THE HON'BLE HIGH COURT HAS DECIDED THE ISSUE IN PAR AS 6 TO 14 OF ITS ORDER BY HOLDING AS UNDER :- 6. AFTER CONSIDERING THE ARGUMENTS OF THE COUNSEL FOR THE COUNSEL FOR THE PARTIES, WE ARE OF THE O PINION THAT THE QUESTION OF LAW NEEDS TO BE ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. OUR REASONS FOR THIS ARE AS FOLLOWS: IT IS NOT IN DISPUTE THAT MR. SUSHIL PAN DIT HOLDS 65% SHARE HOLDING IN THE ASSESSEE COMPANY AS AGAI NST 20% AND 15% HELD BY MR. R.P. SINGH AND MR. VISHA L SHARMA RESPECTIVELY. FOR THIS PURPOSE, IT CAN ALSO B E SAFELY ASSUMED THAT PROVISIONS OF SECTION 40A(2) OF THE ACT CAN BE ATTRACTED. HOWEVER, IN ORDER TO SUSTAIN THE ADDITION MADE BY T HE AO IT IS ALSO ESSENTIAL TO SHOW THAT THE REMUNERATION PAID TO MR. SUSHIL PANDIT WAS EXCESSIVE OR UNREASO NABLE. HAVING REGARD TO THE FAIR MARKET VALUE OF T HE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE. THIS YARDSTICK IS PROVIDED IN SUB SECTION (2) OF SECTION 40A WHICH READS AS UNDER:- 40A EXPENSES OR PAYMENTS NOT DEDUCTIBLE IN CERTAI N CIRCUMSTANCES. (1) ITA NO.1649/DEL./2012 3 (2) (A) WHERE THE ASSESSEE INCURS ANY EXPENDITURE I N RESPECT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERSON REFERRED TO IN CLAUSE (B) OF THIS SUB-SECTI ON, AND THE [ASSESSING] OFFICER IS OF OPINION THAT SUCH EXPENDI TURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHIC H THE PAYMENT IS MADE FOR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEF IT DERIVED BY OR ACCRUING TO HIM THEREFROM, SO MUCH OF THE EXPENDITURE AS IS SO CON SIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT B E ALLOWED AS A DEDUCTION. 7. THE QUESTION WHETHER THE EXPENDI TURE IS EXCESSIVE OR UNREASONABLE IN A GIVEN CASE HAS TO BE EXAMINED KEEPING IN MIND THE SERVICES (WITH WHICH WE ARE CON CERNED IN THE PRESENT CASE) FOR WHICH PAYMENT IS MADE. IN TH E PROCESS THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF T HE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO THE ASSESSEE FROM SUCH SERVICES IS ALSO TO BE KEPT IN M IND. AFTER APPLYING THIS TEST IF IT IS FOUND THAT THE EXPENDITURE IS EXCESSIVE OR UNREASONABLE EXCESS, EXCESS OR UNREASONABLE PORTION OF THE EXPENDITURE IS TO BE DI SALLOWED. WE HAVE ALSO KEPT IN MIND THE PROVISIONS OF SUB SECTION 2 (B) OF SECTION 40-A OF THE ACT AS PER WHICH THE BURDEN IS UPON THE ASSESSEE TO ESTABLISH THAT THE PRICE PAID BY IT IS NOT EXCESSIVE OR UNREASONABLE AS I N THIS CASE MR.SUSHIL PANDIT WAS HOLDING SUBSTANTIAL PORTION OF SHARE NAMELY 65% IN THE ASSESSEE COMPANY. 8. WHEN WE APPLY THE AFORESAID PRINCIPLE IN THE FACTS OF THIS CASE, WE FIND THAT THE ASSESSEE HAS BEEN ABLE TO DISCHARGE THE BURDEN THAT THE PRICE PAID BY IT TO MR. SUSHIL PANDIT IS NOT EXCESSIVE OR UNREASONABLE. 9. AS ACCEPTED BY THE TRIBUNAL ITS ELF, THE CASE OF UTOPIA CONSULTING DOES NOT REPRESENT A VALID COMPARABLE CASE FOR THE REASON THAT IT I S NOT BEING REMUNERATED ON AN ONGOING BASIS AS THE PAYMENT HAD BEEN PAID ONLY IN RESPECT ONE PROJECT. THE AS SESSING OFFICER HAD MADE ADDITION KEEPING IN MIND THE FEE PAID TO UTOPIA ITA NO.1649/DEL./2012 4 CONSULTANCY. ONCE THAT BASIS IS LOCKED OUT, NOTHING REMAINED FOR COMPARISON. HOWEVER, THE TRIBUNAL ADO PTED ANOTHER COMPARISON NAMELY THAT MR. R.P. SINGH TO WH OM THE REMUNERATION OF ` 7.20 LACS WAS PAID, THERE WAS AN INTERNAL COMPARABLE CASE. IN THE PROCESS WHAT IS TOTALLY GLOSSED OVER AND IGNORED BY THE TRIBUNAL IS THAT MR. R.P. SINGH WAS HAVING THE JOB PROFILE OF THE CLIENT MANAGEME NT WHEREAS THE JOB PROFILE OF MR. SUSHIL PANDIT WAS THAT OF MEDIA CONSULTANT. THEREFORE, THE CASE OF MR. R.P. SINGH WAS ALSO COMPARABLE. 10. IT IS TO BE KEPT IN MIND THAT THE ASSESSEE IS I N THE BUSINESS OF ADVERTISING AND MEDIA. IN SUCH A BUSINESS, THE ROLE OF A MEDIA CONSULTANT IS MUCH MORE IMPO RTANT THAN OF THE ROLE OF A CLIENT MANAGEMENT. IN FACT, CONSIDERING THE NATURE OF BUSINESS, MEDIA CONSULTANCY IS TH E BACK BONE OF SUCH BUSINESS AND PLAYS MUCH MORE PIVO TAL ROLE THEN THE PERSONS HANDLING CLIENT MANAGEMENT. FOR THIS RE ASON, IF MR. SUSHIL PANDIT WAS PAID HIGHER REMUNERATION THEN MR. R.P. SINGH, IT COULD NOT BE TREATED AS EXCE SSIVE OR UNREASONABLE, MORE SO, WHEN THE TWO CASES WERE NOT AT PAR AND COULD BE TREATED AS COMPARABLE BY ANY STANDARDS. 11. WE MAY ALSO REFER TO THE SCOPE OF SECTION 40A (2) AS EXPLAINED BY CBDT IN CIRCULAR NO. 6P , DATED 6TH JULY, 1968. THE CBDT CLARIFIED THAT WHILE EXAM INING THE REASONABLENESS OF EXPENDITURE THE ASSESSING OFFICER IS EXPECTED TO EXERCISE HIS JUDGMENT IN A REAS ONABLE AND FAIR MANNER. IT SHOULD BE BORNE IN MIND THAT THE PROVIS ION IS MEANT TO CHECK EVASION OF TAX THROUGH EXCESSIVE OR UN REASONABLE PAYMENTS TO RELATIVES AND ASSOCIATE CONCERN S AND SHOULD NOT BE APPLIED IN A MANNER WHICH WILL CAUSE HARDSHIP IN BONA FIDE CASES. 12. IT WILL ALSO BE USEFUL TO REFER T O THE JUDGMENT OF ALLAHABAD HIGH COURT IN ABBAS WAZIR (P) LTD . VS. CIT (2004) 265 ITR 77 WHEREIN THE HIGH COURT HELD THAT EVEN WHILE INVOKING THE PROVISIONS OF SEC TION 40A(2) OF THE ACT, THE REASONABLENESS OF THE EXPENDITURE FOR THE PURPOSE OF BUSINESS HAS TO BE JUDGED FROM THE POINT OF VIEW OF A BUSINESSMAN AND NOT THAT OF THE REVENUE. THE APPROACH HAS TO BE THAT OF A PRUDENT BUSINESSMAN ITA NO.1649/DEL./2012 5 AND THE REASONABLENESS MUST BE LOOKED IN TO FROM BUSINESSMAN POINT OF VIEW. SIMILAR VIEW IS HELD BY THE MADRAS HIGH COURT IN CIT VS. COMPUTER GRAPHICS LTD. (2006) 285 ITR 84. 13. IN CIT VS. EDWARD KEVENTER (PRIVATE) LTD. (197 20 86 ITR 370, THE CALCUTTA HIGH COURT CONSIDERING IDENTICAL PROVISION IN 1922 ACT, IT WAS HELD THAT THE SECTI ON PLACES TWO LIMITATIONS IN THE MATTER OF EXERCISE OF THE POWER. THE SECTION ENJOINS THE ASSESSING OFFICER IN FORMI NG ANY OPINION AS TO THE REASONABLENESS OR OTHERWISE OF T HE EXPENDITURE INCURRED MUST TAKE INTO CONSIDERATION ( I) THE LEGITIMATE BUSINESS NEEDS OF THE COMPANY AND (II) THE BENEFIT DERIVED BY OR ACCRUING TO THE COMPANY. THE LEGITIMATE BUSI NESS NEEDS OF THE COMPANY MUST BE JUDGED FROM THE VIEW POINT OF T HE COMPANY ITSELF AND MUST BE VIEWED FROM THE POINT OF VIEW OF A PRUDENT BUSINESSMAN. IT IS NOT FOR THE ASSESSING OF FICER TO DICTATE WHAT THE BUSINESS NEEDS OF THE COMPANY SHOU LD BE AND HE IS ONLY TO JUDGE THE LEGITIMACY OF THE BUSINESS NEE DS OF THE COMPANY FROM THE POINT OF VIEW OF A PRUDENT BUSINESSMAN. THE BENEFIT DERIVED OR ACCRUIN G TO THE COMPANY MUST ALSO BE CONSIDERED FROM THE AN GLE OF A PRUDENT BUSINESSMAN. THE TERM B ENEFIT TO A COMPANY IN RELATION TO ITS BUSINESS, IT MUST BE REMEMBERED, HAS A VERY WIDE CONN OTATION AND MAY NOT NECESSARILY BE CAPABLE OF BEING ACCURAT ELY MEASURED IN TERMS OF POUND, SHILLINGS AND PENCE IN ALL CASES . BOTH THESE ASPECTS HAVE TO BE CONSIDERED JUDICIOUSLY, DISPASSI ONATELY WITHOUT ANY BIAS OF ANY KIND FROM THE VIEW-POINT OF A REASONABLE AND HONEST PERSON IN BUSINESS. 14. THE AFORESAID JUDGMENT OF CALCUTTA HIGH COURT WAS AFFIRMED BY THE APEX COURT IN CIT VS. EDWARD KEVENTER (PRIVATE) LTD. (1978) 115 ITR 149 (SC). IN THE SAME LINE IS THE JUDGMENT OF BOMBAY HIGH COURT I N THE CASE OF CIT VS. SHATRUNJAY DIAMONDS (2003) 261 ITR 258 (BOM ). IN VIEW OF THE ABOVE, LD. AR, THEREFORE, PLEADED TH AT THE APPEAL OF THE REVENUE BE DISMISSED. ITA NO.1649/DEL./2012 6 4. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE ORD ER OF THE HON'BLE JURISDICTIONAL HIGH COURT. SINCE THE FACTS INVOLVE D IN THIS YEAR ARE ALSO SIMILAR TO THE FACTS INVOLVED TO THE ASSESSMENT YEA R 2005-06, RESPECTFULLY FOLLOWING THE DECISION OF HON'BLE JURISDICTIONAL HI GH COURT, WE DISMISS THE REVENUES GROUND. 5. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. ORDER PRONOUNCED IN OPEN COURT ON THIS 6 TH DAY OF NOVEMBER, 2012. SD/- SD/- (I.C. SUDHIR) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 6 TH DAY OF NOVEMBER, 2012 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A)-XV, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.