Shri Laxmi Marketing P Ltd, Pune V. ITO wd-6[4] Pune, Pune

ITA 1755/PUN/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 76313 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 6 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2004-2005
• Appeal Filed On: 30-08-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K MODI; S P WALIMBE
• Assessee Lawyers: K SRINIVASAN
• Keywords: Principle of natural justice; Fair market value; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE BEFORE: SHRI G. S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO S. 1754 & 1755 /PN/20 12 ASSESSMENT YEAR S : 2003 - 04 & 2004 - 05 SHREE LAXMI MAR KETING PRIVATE LIMITED, C/O KEDAR TOKEKAR - 117, SHUKRAWAR PETH, KRISHNA COMPLEX, BADAMI HOUD CHOCK, PUNE VS. ITO, WARD - 6(4), PUNE (APPELLANT) (RESPONDENT) PAN NO. AADCS9172M APPELLANT BY: SHRI K. SRINIVASAN RESPONDENT BY: SHRI A.K. MODI & SHRI S. P. WALIMBE DATE OF HEARING : 18 - 02 - 2014 DATE OF PRONOUNCEMENT : 21 - 03 - 2014 ORDER P ER R.S. PADVEKAR , JM : - TH ESE TWO APPEALS ARE FILED BY THE ASSESSEE CHALLENGING THE IMPUGNED ORDER OF THE LD. CIT(A) - III, PUNE DATED 31 - 10 - 2011 FOR THE A.YS. 2003 - 04 AND 2004 - 05. THE ASSESSEE HAS TAKEN THE FOLLOWING GROUNDS WHICH ARE COMMON IN BOTH THE APPEALS: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE MADE BY A.O. OUT OF DIRECTOR'S REMUNERATION INVOKING PROVISIO NS OF SN. 40A(2) OF IT. ACT. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE A.O. FAILED TO FOLLOW THE DIRECTIONS OF ITAT VIDE THEIR ORDER DT. 29 OCT .2008 AND IN MAKING THE SAME ADDITION WHICH HAS BEEN SET ASIDE FOR CONSIDERATION DE NOVO. 3. THE A.O. FAILED TO FOLLOW PRINCIPLES OF NATURAL JUSTICE IN GIVING ADEQUATE OPPORTUNITY TO ASSESSEE AND CONSIDER THE SUBMISSIONS MADE BEFORE HIM AND THEREFORE HIS ORDERS MAY BE HELD AS BAD IN LAW. 2 ITA NOS. 1754 & 1755/PN/ 2012, SHREE LAXMI MARKETING PRIVATE LMITED, PUNE 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE A.O. AND CIT(A) HAVE ERRED IN APPLYING PROVISIONS OF SN. 40A(2) ARBITRARILY WITHOUT ANY MATERIAL TO SHOW THE EXPENDITURE IS UNREASONABLE OR EXCESSIVE. 5. A.O. AND CIT(A) HAVE RELIED ON SN. 40(B) WHICH IS APPLICABLE SPECIFICALLY TO PARTNERSHIP FIRM IGNORING THE PRINCIPLES OF CORPORATE LIABILITY AND TAXATION PROVISIONS AND ALSO GIVING FINDINGS OF UNREASONABLENESS AND EXCESSIVE PAYMENTS ON MERE PRESUMPTIONS AND SURMISES WITHOUT ANY SUPPORTING MATERIAL/EVIDENCE ON RECORD AND ALL FINDINGS MAY BE HELD AS BAD IN LAW AND SET ASIDE . 6. ON THE FACTS AND CIRCUMSTANCES OF THE CASES AND IN LAW THE ADDITION MADE BY A.O. AND CONFIRMED BY CIT(A) MAY BE DELETED IN FULL AND OR APPROPRIATE RELIEF GRANTED TO THE APPELLANT. 2. THIS IS THE SECOND ROUND OF APPEAL BEFORE THE TRIBUNAL. THE ASSES SEE IS PRIVATE LIMITED COMPANY HAVING FOUR DIRECTORS WHO HAPPENED TO BE THE SHAREHOLDER S OF THE ASSESSEE COMPANY. THE ASSESSEE IS ENGAGED IN THE MARKETING OF LOTTERIES OF VARIOUS STATES. THE ISSUE IS CONTROVERSY IS IN RESPECT OF RESTRICTING THE CLAIM OF REMUNERATION TO THE DIRECTORS BY INVOKING THE PROVISIONS OF SEC. 40A(2)(B) OF THE INCOME - TAX ACT. FOR GETTING THE BETTER CLARITY OF THE ISSUE WE ARE REPRODUCING HERE WITH THE FOLLOWING CHART IN WHICH THE DETAILS OF THE REMUNERATION CLAIMED BY THE ASSESSEE ALLOWED BY THE CIT (A) ETC. IS GIVEN: SR. NO. PARTICULARS A.Y. 1999 - 2000 A.Y. 2000 - 01 A.Y. 2001 - 02 A.Y. 2002 - 03 A.Y. 2003 - 04 A.Y. 2004 - 05 1 AS PER RETURN 30,00,000 36,00,000 80,38,400 1,44,38,400 2,00,38,400 2,24,38,400 2 ALLOWED BY AO 30,00,000 36,00,0 00 12,38,400 1,44,38,400 97,96,071 97,33,884 3 ALLOWED BY CIT(A) - - 45,09,008 - 97,96,071 97,33,884 4 ALLOWED BY ITAT - - 48,38,400 - - - 5 REMARK AS PER 143(1) AS PER 143(1) - AS PER 143(1) IN APPEAL BEFORE ITAT 3 ITA NOS. 1754 & 1755/PN/ 2012, SHREE LAXMI MARKETING PRIVATE LMITED, PUNE 3. IN THE FIRST ROUND OF APPEAL BE FORE THE TRIBUNAL THE ISSUE WAS RESTORED TO THE FILE OF THE ASSESSING OFFICER WITH THE FOLLOWING FINDINGS AND DIRECTIONS: 6. HAVING GIVEN OUR CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS AND MATERIAL ON RECORD, WE ARE NOT INCLINED TO UPHOLD THE SUBMISSIO N OF THE ASSESSEE. THE ORDER PASSED BY THE C O - ORDINATE B ENCH CANNOT INDEED BE VIEWED AS AN AUTHORITY FOR THE PROPOSITION THAT A CERTAIN PERCENTAGE OF ENHANCEMENT OVER REMUNERATION PAID TO THE DIRECTORS IN THE IMMEDIATE PRECEDING YEAR IS TO BE TREATED AS F AIR AND REASONABLE ENHANCEMENT. THAT WILL BE STRETCHING THE THINGS TOO FAR. IN OUR CONSIDERED VIEW, ORDER OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 2001 - 02 IS ONLY AN AUTHORITY FOR THE PROPOSITION AS TO WHAT WAS FAIR AND REASONABLE REMUNERATION FOR THE ASS ESSMENT YEAR 2000 - 01. IN CASE THE ASSESSEE IS OF THE VIEW THAT IN THE YEAR BEFORE US, BECAUSE OF DIFFERENCE IN CIRCUMSTANCES, HIGHER REMUNERATION WAS JUSTIFIED, IT IS FOR THE ASSESSEE TO DEMONSTRATE THE SAME. WE, THEREFORE, DEEM IT FIT AND PROPER TO REMI T THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR ADJUDICATION DE NOVO IN THE LIGHT OF THE ABOVE OBSERVATIONS. WHILE DOING SO, THE ASSESSING OFFICER SHALL DEAL WITH THE CONTENTIONS OF THE ASSESSEE BY WAY OF A SPEAKING ORDER, IN ACCORDANCE WITH THE LAW AND IN AN OBJECTIVE MANNER. HE MUST ALSO GIVE A FAIR OPPORTUNITY OF HEARING TO THE ASSESSEE AND BEAR IN MIND GENERAL FACTORS GOVERNING ENHANCEMENT IN REMUNERATION AS ALSO SPECIFIC FACTS OF THIS CASE IF, ANY, WARRANTING HIGHER INCREASE IN REMUNERATION. W ITH THESE DIRECTIONS WE REMIT THE MATTER TO THE FILE OF THE ASSESSING OFFICER. 4. IN SUM AND SUBSTANCE THE TRIBUNAL HELD THAT EVEN IF THE RELIEF IN THE A.Y. 2001 - 02 WAS GIVEN TO THE ASSESSEE THAT P E R SE CANNOT BE THE AUTHORITY IN THE PROPOSITION THAT T O DECIDE REASONABLE REMUNERATION IN THE A.YS. 2003 - 04 AND 2004 - 05 AND T HE SAME PARAMETERS CAN NOT BE APPLIED. THE TRIBUNAL DIRECTED THE ASSESSEE TO DEMONSTRATE THE REASONABLENESS OF THE REMUNERATION CLAIMED. SO FAR AS A.Y. 2001 - 02 IS CONCERNED THE A SSESSEE HAD CLAIM THE REMUNERATION TO THE EXTENT OF RS.80 LACS + CONVEYANCE ALLOWANCE OF RS.9600/ - TO EACH DIRECTORS I.E. 4 ITA NOS. 1754 & 1755/PN/ 2012, SHREE LAXMI MARKETING PRIVATE LMITED, PUNE RS. 20 LACS TO EACH DIRECTORS. IN THE A.Y. 2001 - 02 THE ASSESSING OFFICER INVOKED THE PROVISIONS OF SEC. 40A(2)(B) AND ONLY ALLOWED TH E REMUNERATION TO THE EXTENT OF RS.12,38,400/ - I.E. RS.3 LACS PER YEAR EACH TO FOUR DIRECTORS AND THE MATTER REACHED BEFORE THE CIT(A). THE REMUNERATION WAS ALLOWED TO THE EXTENT OF RS. 45,09,008/ - AND ADDITION WAS REDUCED TO RS.35,29,392/ - AS AGAINST RS.6 8,00,000/ - MADE BY THE ASSESSING OFFICER. THE ASSESSEE WAS NOT HAPPY WITH THE RELIEF GIVEN BY THE LD. CIT(A) AND CARRIED THE ISSUE BEFORE THE TRIBUNAL. THE TRIBUNAL ALLOWED THE CLAIM OF THE REMUNERATION TO THE EXTENT OF RS.1 LACS PER MONTH PER DIRECTOR I N ADDITION TO CONVEYANCE ALLOWANCE PER MONTH TO HIS DIRECTORS TREATING THE SAME AS A REASONABLE WITHIN THE MEANING OF SEC. 40A(2) WHICH WAS FINALLY WORKED OUT AT RS.48,00,000/ - AS REMUNERATION AND RS.38,400/ - AS CONVEYANCE ALLOWANCE. 5. SO FAR AS A.Y. 2002 - 03 IS CONCERNED , THE RETURN FILED BY THE ASSESSEE WAS ACCEPTED IN WHICH THE ASSESSEE HAD CLAIMED THE REMUNERATION TO THE EXTENT OF RS. 1.44 LACS TO FOUR DIRECTORS. AGAIN IN THE A.YS. 2003 - 04 AND 2004 - 05 THE ASSESSEE CLAIMED THE REMUNERATION TO THE EXT ENT OF RS.2 LACS AND RS.2.4 LACS PER ANNUM TO FOUR DIRECTORS IN ADDITION TO RS. 38,400/ - AS CONVEYANCE ALLOWANCE. WHILE GIVING EFFECT TO THE DIRECTIONS OF THE TRIBUNAL , THE ASSESSING OFFICER ADOPTED THE FORMULA GIVEN IN SEC. 40(B) OF THE ACT FOR WORKING OU T OF THE REMUNERATION PAYABLE TO THE WORKING PARTNERS OF THE FIRM. HE, ACCORDINGLY, ALLOWED THE REMUNERATION TO THE EXTENT OF RS. 97,96,071/ - INCLUDING THE CONVEYANCE ALLOWANCE IN THE A.Y. 2003 - 04 AND RS.97,33,884/ - IN THE A.Y. 2004 - 05 RESPECTIVELY . THE A SSESSING OFFICER HAS OBSERVED THAT THE ASSESSEE DID NOT INDEPENDENTLY DEMONSTRATE W HAT WAS JUSTIFICATION FOR A STIFF RISE IN THE PAYMENT OF THE REMUNERATION TO THE DIRECTORS AND THE ASSESSEE ONLY REITERATED HIS ARGUMENT WHICH WAS MADE IN THE ORIGINAL ASSES SMENT PROCEEDINGS. THE ASSESSING OFFICER CONFIRMED 5 ITA NOS. 1754 & 1755/PN/ 2012, SHREE LAXMI MARKETING PRIVATE LMITED, PUNE THE DISALLOWANCE MADE IN THE ORIGINAL ORDER. THE CIT(A) ALSO DISMISSED THE APPEAL FILED BY THE ASSESSEE CONFIRMING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. THE OPERATIVE PART OF THE LD. CIT(A) IS AS UNDER: 5.3. THE FACTS AND CIRCUMSTANCES OF THE CASE ARE NOW EXAMINED IN THE LIGHT OF THE DIRECTIONS OF THE ITAT, PUNE IN ITS LATEST ORDERS DATED 29.10.2008 AND 31.10.2008 FOR THE YEARS UNDER CONSIDERATION AND ALSO THE RELEVANT OBSERVATIONS AND FINDIN GS IN THE ORDERS OF CIT(A) - II, PUNE REFERRED ABOVE AND ALSO THE ORDER OF THE ITAT PUNE IN THE APPELLANT'S OWN CASE FOR THE A.Y. 2001 - 02 (119 ITD 390). THE CRUCIAL POINT FOR DETERMINATION IN THE PRESENT CASE IS WHETHER REMUNERATION PAID TO THE DIRECTORS DUR ING THE YEARS UNDER CONSIDERATION IS REASONABLE OR COMMENSURATE WITH THE SERVICES RENDERED BY THE DIRECTORS TO THE COMPANY OR PAYMENT WAS INFLUENCED BY ANY EXTRA COMMERCIAL CONSIDERATION. THE MATTER IN DISPUTE IS EXAMINED AND DEALT WITH UNDER THE FOLLOWING BROAD HEADS: A) LEGITIMATE NEEDS OF THE BUSINESS AND COMMERCIAL EXPEDIENCY FOR MAKING PAYMENT OF, REMUNERATION TO DIRECTORS TO THE EXTENT CLAIMED BY THE APPELLANTS 5.4. THE CONTENTION OF THE APPELLANT IN THIS REGARD IS THAT THE ENTIRE AFFAIRS OF THE APPE LLANT COMPANY INCLUDING PLANNING, ADMINISTRATION, MANAGEMENT AND SUPERVISION WERE MANAGED BY ITS DIRECTORS, WHO HAD RELEVANT EXPERIENCE IN THE FIELD AND THE SERVICES RENDERED BY THE DIRECTORS WERE ESSENTIAL NOT ONLY FOR SMOOTH RUNNING OF THE BUSINESS BUT A LSO FOR THE GROWTH AND SURVIVAL OF THE COMPANY, IT IS VEHEMENTLY ARGUED BY THE LD. COUNSEL THAT THE CLAIM OF REMUNERATION IS JUSTIFIED HAVING REGARD TO THE LEGITIMATE NEEDS OF THE BUSINESS OF THE APPELLANT AND IS COMMENSURATE WITH THE SERVICES RENDERED BY THE DIRECTORS, WHICH ENABLED THE COMPANY TO INCREASE ITS VOLUME OF BUSINESS AND SALES SUBSTANTIALLY OVER THE YEARS AND THE TURNOVER OF THE COMPANY REACHED RS. 250 CRORES IN THE YEARS UNDER APPEAL. BEFORE PROCEEDING FURTHER, IT IS TO BE CLARIFIED THAT IT IS NOT THE CASE OF THE ASSESSING OFFICER THAT THE DIRECTORS HAVE NOT RENDERED ANY SERVICES TO THE COMPANY AND THE APPELLANT OUGHT NOT TO HAVE PAID ANY REMUNERATION AT ALL TO THE DIRECTORS. THE CONTROVERSY IS ONLY WITH REGARD TO THE QUANTUM OF 6 ITA NOS. 1754 & 1755/PN/ 2012, SHREE LAXMI MARKETING PRIVATE LMITED, PUNE REMUNERATION PA YABLE TO THE DIRECTORS HAVING REGARD TO THE LEGITIMATE BUSINESS NEEDS OF THE APPELLANT AND SERVICES RENDERED BY THE DIRECTORS TO THE APPELLANT. IN THE PRESENT CASE, THE BUSINESS CARRIED ON BY THE APPELLANT DURING THE YEARS WAS DISTRIBUTION AND SALE OF STAT E LOTTERY TICKETS. THE BUSINESS ACTIVITY CARRIED ON BY THE COMPANY MAINLY INVOLVES LIAISON WITH RESPECTIVE STATE GOVERNMENTS, DEALING WITH SUB - AGENTS, FORWARDING THE LOTTERY TICKETS TO THE RETAIL OUTLETS IN TIME AND REALIZATION OF THE SALE PRICE FROM SUB - A GENTS/RETAILERS AFTER SALE OF LOTTERY TICKETS, MAKING PAYMENT TO THE STATE GOVT. THE NATURE OF ACTIVITY IS SUCH THAT IT DOES NOT REQUIRE SPECIALIZED SKILL OR EXPERTISE OR TECHNICAL QUALIFICATIONS TO CARRY ON THE BUSINESS. IT IS TO BE BORNE IN MIND THAT THE PRICE OF THE LOTTERY TICKETS IS FIXED BY THE RESPECTIVE STATE GOVERNMENTS AND THE PRICE DOES NOT VARY WITH THE EXPERTISE OR BUSINESS ACUMEN OF THE DIRECTORS. IT IS ALSO IMPORTANT TO NOTE THAT THE APPELLANT WAS NOT DEALING WITH TOO MANY CUSTOMERS AND SALES WERE MADE TO ONLY LIMITED NUMBER OF SUB - AGENTS AND ALSO THE AREA OF OPERATION WAS MAINLY IN PUNE CITY. MOREOVER, THE BUSINESS WAS CARRIED ON BY THE APPELLANT NOT ONLY BY UTILIZING THE SERVICES OF THE DIRECTORS BUT ALSO TAKING THE ASSISTANCE OF A TEAM OF R EGULAR EMPLOYEES OF THE COMPANY. FURTHER, IT IS NOT IN DISPUTE THAT THE DIRECTORS WERE HAVING THEIR OWN INDEPENDENT BUSINESS AND NEEDLESS TO MENTION THAT THE DIRECTORS WOULD HAVE ALSO BEEN DEVOTING CONSIDERABLE TIME AND ENERGY FOR THEIR INDIVIDUAL BUSINESS ACTIVITIES. WHEN THE DIRECTORS WERE HAVING THEIR OWN INDIVIDUAL BUSINESS, IT CANNOT BE SAID THAT THEY WERE INVOLVED FULL TIME IN THE BUSINESS ACTIVITIES OF THE APPELLANT COMPANY. IT IS COMMON KNOWLEDGE THAT THE TURNOVER IN A PARTICULAR YEAR MAY INCREASE O N ACCOUNT OF SEVERAL FACTORS, WHICH INCLUDE MARKET FACTORS, GENERAL ECONOMY, SOLE DISTRIBUTION/FRANCHISE RIGHTS FOR SALE OF GOODS AND SERVICES IN A PARTICULAR AREA, WHICH IS THE CASE OF THE APPELLANT IN RESPECT OF SALE OF LOTTERY TICKETS, MARKET MONOPOLY O F A PRODUCT/ SERVICE, BRAND IMAGE OF THE PRODUCT AND SERVICES AND IT DOES NOT SOLELY DEPEND ON THE WORK DONE OR SERVICES RENDERED BY A FEW WORKING DIRECTORS. THEREFORE, THE GROWTH IN THE BUSINESS AND THE TURNOVER AS REPORTED BY THE COMPANY OVER THE YEARS C ANNOT BE SOLELY ATTRIBUTED TO THE SERVICES RENDERED BY THE DIRECTORS AND IT DOES NOT BY ITSELF JUSTIFY PAYMENT OF SUCH HUGE REMUNERATION TO THE DIRECTORS EVERY YEAR. THE PAYMENT OF HUGE REMUNERATION TO 7 ITA NOS. 1754 & 1755/PN/ 2012, SHREE LAXMI MARKETING PRIVATE LMITED, PUNE DIRECTORS FOR THESE TWO YEARS WHEN THERE WAS EXCEPTION AL TURNOVER IS NOTHING BUT EXTRA COMMERCIAL CONSIDERATION OR DIVIDEND FOR THE REASON THAT HAD IT BEEN A GENUINE REMUNERATION LINKED TO THE SERVICES RENDERED BY THE DIRECTORS, THE APPELLANT WOULD HAVE CONTINUED THE PAYMENT OF SAME REMUNERATION AND EVEN MIGH T HAVE INCREASED IN THE SUBSEQUENT YEARS TO FURTHER IMPROVE THE PERFORMANCE OF THE COMPANY. BUT, THE REMUNERATION PAID HAS DRASTICALLY FALLEN IN SUBSEQUENT YEARS AND IN FACT NIL FOR THE A.Y. 2005 - 06 EVEN THOUGH TURNOVER AND PROFIT WERE BOTH DECLINING DRAST ICALLY. IF THE DIRECTORS HAVE BEEN RENDERING YEOMAN SERVICE TO THE COMPANY AS CLAIMED BY THE APPELLANT, THERE CANNOT BE SUCH A STEEP FALL IN BUSINESS AND TURNOVER OF THE COMPANY IN THE SUBSEQUENT YEARS. IN FACT, THE TURNOVER OF THE APPELLANT HAS FALLEN TO 37.86 CRORES DURING THE F.Y. 2006 - 07. ALL THESE FACTS CLEARLY DEMONSTRATE THAT THE STEADY RISE IN THE BUSINESS AND THE TURNOVER IN THE YEARS UNDER CONSIDERATION AND THE EARLIER TWO YEARS WERE MAINLY DUE TO MARKET CONDITIONS, POLICY OF STATE GOVERNMENTS RE GARDING LOTTERY BUSINESS AS A WHOLE AND SEVERAL OTHER FACTORS AND NOT SOLELY BECAUSE OF ANY EXTRA SERVICES RENDERED BY THE DIRECTORS. 5.4.1. THE APPELLANT ON ITS PART, EXCEPT MAKING VAGUE CLAIMS AND GENERAL ASSERTIONS, FAILED TO LEAD ANY CONCRETE EVIDENCE TO SHOW THAT CERTAIN EXTRA SERVICES WERE RENDERED BY THE DIRECTORS DURING THE YEARS, WHICH CONTRIBUTED TO THE GROWTH OF THE COMPANY. THE APPELLANT ALSO FAILED TO PROVE THAT THE DIRECTORS WERE ENTRUSTED WITH OR HAD TAKEN ADDITIONAL DUTIES AND RESPONSIBILIT IES OF THE COMPANY ON THEIR OWN DURING THE YEARS UNDER CONSIDERATION AS COMPARED TO THE EARLIER YEARS, WHICH NECESSITATED EXPONENTIAL INCREASE IN REMUNERATION IN THESE YEARS. IT IS ALSO NOTICED THAT THE INCREASE IN REMUNERATION WAS NOT EXACTLY LINKED TO PE RCENTAGE INCREASE IN TURNOVER OR PROFITS IN A PARTICULAR YEAR AND IT WAS AN ADHOC INCREASE EVERY YEAR AND THEREFORE IT CANNOT BE SAID TO BE STRICTLY PERFORMANCE BASED. FURTHER, THE APPELLANT ALSO FAILED TO ESTABLISH THAT SIMILAR PERFORMANCE BASED INCREASE WAS ALSO EFFECTED IN CASE OF OTHER EMPLOYEES OF THE COMPANY ALSO. AS OBSERVED BY THE ITAT, PUNE IN THE ORDER FOR THE A.Y. 2001 - 02, IT IS NOT CORRECT TO SAY THAT THE ASSESSING OFFICER SHOULD PROVE BY INDEPENDENTLY COLLECTING EVIDENCE THAT THE REMUNERATION C LAIMED IS EXCESSIVE AND 8 ITA NOS. 1754 & 1755/PN/ 2012, SHREE LAXMI MARKETING PRIVATE LMITED, PUNE UNREASONABLE BEFORE THE POWER U/S.40A(2)(B) IS EXERCISED BY THE ASSESSING OFFICER. IT IS FOR THE APPELLANT TO PRODUCE THE NECESSARY EVIDENCE LIKE DETAILS OF EFFORTS OF THE DIRECTORS, IF ANY, IN A PARTICULAR AREA OF ACTIVITY DURING T HE YEARS, BENEFIT ACCRUED TO THE APPELLANT TO' JUSTIFY SUCH A STEEP INCREASE IN REMUNERATION IN THE YEARS UNDER CONSIDERATION. BUT, THE APPELLANT HAS FAILED TO PRODUCE ANY CREDIBLE EVIDENCE REGARDING THE MANNER IN WHICH THE TURNOVER WAS INCREASED BY REASON OF DIRECTORS' SPECIAL EFFORTS, QUALIFICATIONS SO AS TO JUSTIFY ITS DECISION TO INCREASE TOTAL REMUNERATION PAID TO FOUR DIRECTORS. THUS, DESPITE THE SPECIFIC DIRECTIONS OF THE ITAT, PUNE, THE APPELLANT COULD NOT DEMONSTRATE WITH RELIABLE AND COGENT DATA T HAT THE REMUNERATION PAID TO THE DIRECTORS IS COMMENSURATE WITH THE BUSINESS NEEDS OF THE COMPANY AND SERVICES RENDERED BY THE DIRECTORS TO THE COMPANY. AS REGARDS THE ARGUMENT OF THE APPELLANT THAT THE INCREASE IN REMUNERATION WAS ON THE BASIS OF THE RESO LUTION PASSED IN THE MEETING OF THE BOARD OF DIRECTORS OF THE COMPANY AND CLAUSE NO. 37 OF THE ARTICLES OF ASSOCIATION OF THE COMPANY, IT IS TO BE MENTIONED THAT THE BOARD RESOLUTION AND THE SAID ARTICLE CANNOT BE CONSIDERED AS AN EVIDENCE OF EXTRA SERVICE S RENDERED BY THE DIRECTORS PARTICULARLY WHEN THE BOARD IS CONSTITUTED BY THE SAME DIRECTOR EMPLOYEES TO WHOM THE PAYMENTS HAVE BEEN MADE. ON THE FACTS OF THE CASE, THE STEEP INCREASE IN THE REMUNERATION FROM RS. 80,38,400/ - IN A.Y. 2001 - 02 TO RS 2.24 CROR ES IN A.Y. 2004 - 05 CANNOT BE SAID TO BE OUT OF COMMERCIAL EXPEDIENCY BUT WAS INFLUENCED BY EXTRA COMMERCIAL CONSIDERATION I.E. SHIFTING INCIDENCE OF TAX TO THE INDIVIDUAL DIRECTORS, WHICH ATTRACTS LOWER RATE OF TAX AND ALSO AVOIDING PAYMENT OF DIVIDEND DIS TRIBUTION TAX BY THE COMPANY. 5.4.2. IN SUPPORT OF THE CLAIM THAT THE REMUNERATION WAS PAID OUT OF COMMERCIAL EXPEDIENCY AND THE REASONABLENESS OF THE EXPENDITURE HAS TO BE JUDGED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT THE REVENUE, T HE APPELLANT RELIED ON SEVERAL AUTHORITIES. BUT, IN THE PRESENT CASE, THE ASSESSING OFFICER HAS NOT ADOPTED A SUBJECTIVE STANDARD OF REASONABLENESS OF THE REMUNERATION TO DIRECTORS, BUT APPLIED HIS MIND PROPERLY AND TAKEN INTO CONSIDERATION ALL THE RELEVAN T FACTORS LIKE NATURE OF BUSINESS OF THE APPELLANT, EXPERTISE AND SKILLS REQUIRED TO CARRY ON SUCH BUSINESS, SALARY PAID TO OTHER EMPLOYEES OF THE COMPANY, 9 ITA NOS. 1754 & 1755/PN/ 2012, SHREE LAXMI MARKETING PRIVATE LMITED, PUNE LEGITIMATE BUSINESS NEEDS OF THE COMPANY AND THE DRASTIC FALL IN THE TURNOVER IN SUBSEQUENT YEARS DE SPITE THE FACT THAT THE SAME DIRECTORS CONTINUED TO WORK WITH THE COMPANY BEFORE DISALLOWING A PART OF REMUNERATION BASED ON THE PROVISIONS OF SEC. 40(B). THEREFORE, IT IS NOT CORRECT TO SAY THAT IN THE INSTANT CASE, THE ASSESSING OFFICER HAS ACTED AUTOMAT ICALLY AND FOLLOWED THE ORDER OF THE EARLIER YEAR WITHOUT APPLYING HIS MIND OBJECTIVELY AND JUDICIOUSLY. THEREFORE, THE DECISIONS RELIED UPON BY THE APPELLANT, WHICH WERE RENDERED IN A DIFFERENT FACTUAL CONTEXT CANNOT BE APPLIED TO THE FACTS OF THE PRESENT CASE. 5.4.3. THUS, HAVING REGARD TO THE NATURE OF BUSINESS, LEGITIMATE BUSINESS NEEDS OF THE. APPELLANT, SALARY PAID TO OTHER EMPLOYEES OF THE COMPANY, REMUNERATION TO THE DIRECTORS CLAIMED BY THE APPELLANT IS NO DOUBT EXCESSIVE AND UNREASONABLE AND IT W AS INTENDED TO RESTRICT THE TAX LIABILITY WHICH WOULD HAVE BEEN PAYABLE BY THE COMPANY. B) 'FAIR MARKET VALUE' OF THE SERVICES RENDERED BY THE DIRECTORS DURING THE YEARS: 5.5. AS DISCUSSED ABOVE, LOOKING INTO THE NATURE OF THE BUSINESS CARRIED ON BY THE COMPANY, THE EXPERTISE AND EXPERIENCE REQUIRED TO CARRY ON SUCH BUSINESS, REMUNERATION PAID TO OTHER EMPLOYEES OF THE COMPANY AND ALSO KEEPING IN MIND THE INDIVIDUAL BUSINESSES BEING CARRIED ON BY THE DIRECTORS,, THE REMUNERATION PAID BY THE APPELLANT TO THE DIRECTORS IS UNDOUBTEDLY EXCESSIVE OR UNREASONABLE AND NOT COMMENSURATE WITH THE SERVICES RENDERED BY THE DIRECTORS. THEREFORE, PART OF THE REMUNERATION PAID TO THE DIRECTORS, WHICH IS EXCESSIVE OR UNREASONABLE, IS REQUIRED TO BE DISALLOWED UNDER S ECTION 40A(2) OF THE INCOME TAX ACT, 1961. THE QUESTION THAT LOGICALLY FOLLOWS IS WHAT COULD BE THE FAIR AND REASONABLE REMUNERATION FOR THE SERVICES RENDERED BY THE DIRECTORS TO THE COMPANY IN THE YEARS UNDER APPEAL. IN THE CASE OF A PUBLIC LIMITED COMPAN Y, UNDER THE COMPANIES ACT, PAYMENT OF REMUNERATION TO WHOLE TIME WORKING DIRECTORS IS RESTRICTED TO 11% OF THE NET PROFIT OF THE COMPANY. HOWEVER, THERE IS NO SUCH RESTRICTION IN THE CASE OF A PRIVATE LIMITED COMPANY. THE APPELLANT IS A PRIVATE LIMITED CO MPANY AND THE FOUR DIRECTORS OF THE COMPANY ARE ITS 10 ITA NOS. 1754 & 1755/PN/ 2012, SHREE LAXMI MARKETING PRIVATE LMITED, PUNE SHAREHOLDERS. THE COMPOSITION OF THE COMPANY IS AKIN TO A PARTNERSHIP FIRM, AS THE FOUR DIRECTORS ARE THE SHAREHOLDERS, WHO HAVE CONTRIBUTED TO THE CAPITAL OF THE COMPANY. IN SUCH CIRCUMSTANCES, THE REASO NABLENESS OF THE PAYMENT OF REMUNERATION TO THE DIRECTORS IN THE INSTANT CASE CAN BE CONSIDERED IN THE LIGHT OF THE AMOUNT OF REMUNERATION TO THE PARTNERS AS ADMISSIBLE UNDER SECTION 40(B) OF THE INCOME TAX ACT, 1961 AND THE CRITERION LAID DOWN THEREIN WOU LD PROVIDE VERY FAIR AND OBJECTIVE STANDARD FOR CONSIDERING THE REASONABLENESS OF THE REMUNERATION PAID BY THE APPELLANT TO ITS FOUR DIRECTORS. IN THE ABSENCE OF ANY OTHER CRITERION OR EVIDENCE TO THE CONTRARY FILED BY THE APPELLANT, THE BASIS LAID DOWN IN SECTION 40(B) PROVIDES A REASONABLE BASIS AND A GUIDING FACTOR TO ARRIVE AT THE REASONABLE REMUNERATION PAYABLE TO DIRECTORS FOR THE SERVICES RENDERED. THEREFORE, THE APPROACH OF THE ASSESSING OFFICER IN DETERMINING THE FAIR MARKET VALUE OF THE SERVICES R ENDERED BY THE DIRECTORS DURING THE YEARS ON THE BASIS OF FORMULA PROVIDED IN SECTION 40(B) CANNOT BE FAULTED WITH AND THE METHOD ADOPTED BY THE ASSESSING OFFICER IS AN OBJECTIVE AND SCIENTIFIC BASIS TO ARRIVE AT THE FAIR AND REASONABLE REMUNERATION PAYABL E TO THE DIRECTORS. 5.6. ONE OF THE ARGUMENTS CANVASSED BY THE APPELLANT IS THAT THE ENTIRE REMUNERATION WAS OFFERED AS INCOME IN THE HANDS OF INDIVIDUAL DIRECTORS AND THE TAX PAYABLE BY THE DIRECTORS ON THE ENTIRE REMUNERATION WAS DEDUCTED BY WAY OF TDS. BUT, MERE FACT THAT THE REMUNERATION WAS OFFERED AS INCOME IN THE INDIVIDUAL RETURNS 6F THE DIRECTORS DOES NOT JUSTIFY SUCH ABNORMAL AMOUNT OF EXPENDITURE ON ACCOUNT OF REMUNERATION OR OTHERWISE IN THE HANDS OF THE APPELLANT COMPANY. THE BUSINESS NECESSITY AND REASONABLENESS OF THE EXPENDITURE INCURRED BY THE APPELLANT HAS TO BE EVALUATED INDEPENDENTLY IN THE HANDS OF THE COMPANY. IN THE CASE OF THE APPELLANT, IT WAS FOUND ON SUCH EXAMINATION THAT REMUNERATION CLAIMED IS FAR EXCESSIVE AND REASONABLE AND NOT COMMENSURATE WITH THE SERVICES RENDERED BY THE DIRECTORS. 5.7. FROM THE FACTS OF THE CASE AND THE ABOVE DISCUSSION, THE ONLY LOGICAL INFERENCE THAT FOLLOWS IS THAT THE REMUNERATION PAID TO THE DIRECTORS DURING THE YEARS IS FAR EXCESSIVE AND UNREASONABLE H AVING REGARD TO THE LEGITIMATE BUSINESS NEEDS OF THE APPELLANT 11 ITA NOS. 1754 & 1755/PN/ 2012, SHREE LAXMI MARKETING PRIVATE LMITED, PUNE AND THE FAIR MARKET VALUE SERVICES RENDERED BY THE DIRECTORS TO THE COMPANY. THE FACTS OF THE CASE DO NOT INDICATE THAT SUCH HUGE REMUNERATION WAS PAID TO DIRECTORS OUT OF ANY COMMERCIAL EXPEDI ENCY OF THE APPELLANT'S BUSINESS. THE APPELLANT HAS ALSO FAILED TO PROVE WITH RELIABLE DATA THAT THE PAYMENT OF REMUNERATION IS COMMENSURATE WITH THE SERVICES RENDERED BY ITS DIRECTORS. ACCORDINGLY, DISALLOWANCE OF EXCESSIVE REMUNERATION TO DIRECTORS OF RS . 1, 02,42,3297 - AND RS, 1,27,04,516/ - MADE BY THE ASSESSING OFFICER UNDER SEC. 40A(2) FOR THE A.Y. 2003 - 04 AND THE A.Y. 2004 - 05 RESPECTIVELY, ON THE BASIS OF CRITERION PROVIDED IN SEC. 40(B), DOES NOT CALL FOR ANY INTERFERENCE AND THE SAME IS UPHELD. 5.8. THE APPELLANT HAS ALSO TAKEN AN ALTERNATE GROUND WHEREIN IT HAS SOUGHT TO SUSTAIN THE ADDITION ONLY TO THE EXTENT OF THE DIFFERENTIAL AMOUNT OF TAX THAT WOULD BE PAYABLE CONSIDERING THE REMUNERATION IN THE HANDS OF THE INDIVIDUAL DIRECTOR. IT IS STATED TH AT THE TAX PAYABLE BY 'THE DIRECTORS ON THE ENTIRE REMUNERATION PAID TO THEM HAVE BEEN DEDUCTED BY WAY OF TDS. IN THIS CONTEXT, THE A.R. FOR THE APPELLANT HAS FURNISHED A FOLLOWING WORKING: ASSTT. YEAR REMUNERATION TO DIRECTORS REMUNERATION ALLOWED BY THE A . O. EXCESS REMUNERATION DISALLOWED I.T. IN THE CASE OF THE APPELLANT COMPANY I.T. IN THE CASE OF INDIVIDUAL DIRECTORS LOSS TO REVENUE (SUBJECT TO INTEREST) 2003 - 04 2,00,38,400 97,96,071 1,02,42,329 37,64,056 31,99,034 5, ,65,022 IT 35% + SC 5% = 36.75% AS PER APPLICABLE TAX SLABS 2004 - 05 2,24,38,400 97,33,884 1,27,04,516 45,57,745 41,63,890 3,93,855 IT 35% + SC 2.5% = 35.875% AS PER APPLICABLE TAX SLABS 5.8.1. THE AL TERNATE CONTENTION OF THE APPELLANT IS CAREFULLY EXAMINED. HOWEVER, THE SAME CANNOT BE ACCEPTED. THE DISALLOWANCE UNDER QUESTION HAS BEEN MADE BY THE ASSESSING OFFICER UNDER THE PROVISIONS OF SEC. 40A(2)(B). THERE IS NO PROVISION UNDER THE I.T. ACT TO CORR ESPONDINGLY REDUCE THE REMUNERATION TO THE EXTENT OF DISALLOWANCE, WHICH WAS MADE UNDER THE ABOVE SECTION IN THE CASE OF THE COMPANY, IN THE HANDS OF THE INDIVIDUAL DIRECTORS OF 12 ITA NOS. 1754 & 1755/PN/ 2012, SHREE LAXMI MARKETING PRIVATE LMITED, PUNE THE COMPANY, UNLIKE DISALLOWANCE MADE U/S. 40(B) IN CASE OF PARTNERSHIP FIRMS WHEREIN THE LEGISLATURE HAS GIVEN THE MANDATE FOR CONSEQUENTIAL REDUCTION IN THE INCOME OF THE RESPECTIVE PARTNERS, AS PROVIDED IN SEC.28(V) OF THE I.T. ACT, ACCORDINGLY, THE ALTERNATE CONTENTION RAISED BY THE APPELLANT IS REJECTED. NOW THE ASSESSEE BEIN G AGGRIEVED HAS FILED APPEALS BEFORE THE TRIBUNAL. 6. WE HAVE HEARD THE PARTIES. AS PER THE FACTS AND FIGURES ON RECORD IT IS SEEN THAT THE FINANCIAL YEAR WISE POSITION OF THE ASSESSEE TOWARDS THE SALES AND REMUNERATION PAID TO FOUR DIRECTORS ARE AS UNDER : F.Y. SALES REMUNERATION NET PROFIT 2000 - 01 1225162745 8038400 3185022 2001 - 02 1974261748 14438400 7929552 2002 - 03 2657780434 20038400 4321780 2003 - 04 2882073364 22438400 1665021 2004 - 05 1229749483 0 74492 7. ON THE PERUSAL OF THE ABOVE FIGURES IT IS SEEN THAT THERE IS STIFF INCREASE IN THE SALES OF THE ASSESSEE AS IN A.YS. 2003 - 04 & 2004 - 05 COMPARED TO A.YS. 2001 - 02 AND 2002 - 03 TO THE EXTENT OF RS.2.65 CRORES AND RS.2.88 CRORES AS COMPARED TO RS.1.22 CRORES AND RS.1.97 CRORES FOR THE A.YS. 2000 - 01 AND 2001 - 02 RESPECTIVELY. THE APPROACH OF THE ASSESSING OFFICER IS NOT CORRECT TO ADOPT THE METHODOLOGY GIVEN FOR THE WORKING OUT THE REMUNERATION U/S. 40(B) OF THE ACT WHICH IS IN RESPECT OF REMUNERATION PAYABLE TO THE WORKING PARTNERS OF THE FIRM . IN THE SAID SEC. 40(B) N OWHERE IT IS CONTEMPLATE D WHAT IS THE REASONABLENESS BUT IN FACT PUT A CEILING ON THE MAXIMUM ALLOWABLE DEDUCTION TOWARDS THE REMUNERATION PAID TO THE PARTNERS OF THE FIRM AS SUCH . THE REASONABLENESS IS A VERY WIDE TERM AND ISSUE HAS TO BE SETTLED SOMEWHERE. IN OUR OPINION IF THE FOLLOWING REMUNERATION IS ALLOWED TO 13 ITA NOS. 1754 & 1755/PN/ 2012, SHREE LAXMI MARKETING PRIVATE LMITED, PUNE THE DIRECTORS AS A DEDUCTION THEN THERE SHOULD NOT BE GRIEVANCE TO THE ASSESSEE AS IN OUR OPINION CONSIDERING THE FACTS OF THE SALES IT SHOULD BE REASONABLE REMUNERATION. WE, ACCORDINGLY, DIRECT THE ASSESSING OFFICER TO WORK OUT THE REMUNERATION AT RS.36 LACS PER YEAR PER DIRECTOR IN ADDITION TO THE CONVEYANCE ALLOWANCE FOR THE A.YS. 2003 - 04 AND 2004 - 05 AND ACCORDINGLY ALLOW THE SAME AND BALANCE IS TO BE DISALLOWED. THE TOTAL REMUNERATION WORKED OUT AS UNDER: A.Y. REMUNERATION CONVEYANCE ALLOWANCE TOTAL 2003 - 04 1.44 CRORES 38,400 1,44,38,400 2004 - 05 1.44 CRORES 38,400 1,44,38,400 8. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE PARTLY ALLOWED. PRONOUNCED I N THE OPEN COURT ON 21 - 03 - 201 4 SD/ - SD/ - ( G.S. PANNU ) ( R.S. PADVEKAR ) ACCOUNTANT MEMBER JUDICIAL MEMBER RK /PS PUNE , DATED : 21 ST MARCH, 20 1 4 COPY TO 1 ASSESSEE 2 DEPARTMENT 3 THE CIT(A) - III, PUNE 4 THE CIT - III, PINE 5 THE DR, ITAT, B BENCH, PUNE . 6 GUARD FILE. //TRUE COPY// BY ORDER PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL PUNE