Rotomag Motors & Controls Pvt. Ltd., Anand V. The Deputy Commissioner of Income Tax, Anand Circle, Anand

ITA 184/AHD/2017

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 2933 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 1 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-03-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 20-01-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: LALIT P JAIN
• Keywords: Opportunity of being heard; Question of law; Fair market value
• Section: 143(3)

Judgement Text

ITA NO.: 184/AHD/17 ASSESSMENT YEAR: 2012-13 PAGE 1 OF 4 IN THE INCOME TAX APPELLATE TRIBUNAL, AHMEDABAD D BENCH, AHMEDABAD [CORAM: JUSTICE P P BHATT, PRESIDENT AND PRAMOD KUM AR, VICE PRESIDENT] ITA NO.: 184/AHD/17 ASSESSMENT YEAR: 2012-13 ROTOMAG MOTORS & CONTROLS PVT LTD .....AP PELLANT C-1/5, VITTHAL UDYOGNAGAR, GIDC ESTATE VITTHAL UDYOGNAGAR, ANAND 388 121 [PAN:AAACR 9061 K] VS. DEPUTY COMMISSIONER OF INCOME TAX ANAND CIRCLE, ANAND ............RESPONDE NT APPEARANCES BY SHAILESH SHAH, FOR THE APPELLANT LALIT P JAIN FOR THE RESPONDENT DATE OF CONCLUDING THE HEARING : DECEMBER 6, 2018 DATE OF PRONOUNCEMENT : MARCH 4, 2019 O R D E R PER PRAMOD KUMAR, VP: 1. THIS APPEAL, FILED BY THE ASSESSEE, IS DIRECTED AGAINST THE ORDER DATED 17 TH OCTOBER 2016 PASSED BY THE CIT(A) IN THE MATTER OF ASSESSME NT UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961, FOR THE ASSESSMENT YEAR 2012-13. 2. GRIEVANCE OF THE ASSESSEE, IN SUBSTANCE, IS AGAI NST LEARNED CIT(A)S CONFIRMING THE DISALLOWANCE OF RS 14,67,000, IN RESPECT OF REMUNER ATION TO DIRECTORS, UNDER SECTION 40A(2)(B) OF THE ACT. 3. THE ISSUE IN APPEAL LIES IN A NARROW COMPASS OF MATERIAL FACTS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTIC ED THAT THERE IS A FALL IN TURNOVER OF THE ASSESSEE AND THE NET PROFIT RATE OF THE ASSESSEE. W HILE THE TURNOVER HAS REDUCED FROM RS 21,20,03,364, IN THE IMMEDIATELY PRECEDING YEAR, TO RS 19,93,43,791 IN THE PRESENT ASSESSMENT YEAR, THE NET PROFIT RATE HAS DECREASED FROM 13.85% TO 11.70%. THE ASSESSING OFFICER ALSO NOTED THAT, AT THE SAME TIME, THE REMU NERATION TO THE DIRECTORS, WHICH WAS ADMITTEDLY NOT REVISED IN THE LAST 5 YEARS, HAS INC REASED FROM RS 34,08,000 TO RS 48,75,000. THE INCREASE OF RS 14,67,000 WAS CONSIDERED EXCESS IVE AND UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF GOODS, SERVICES OR FACILIT IES ETC AS THERE WAS NO SPECIFIC REASON WARRANTING THE INCREASE AND THE MERE FACT THAT IT W AS NOT REVISED IN LAST 5 YEARS WAS, BY IMPLICATION, NOT CONSIDERED REASON ENOUGH. IT WAS A LSO OBSERVED THAT THERE IS A FALL IN TURNOVER AND PROFITABILITY. ACCORDINGLY, RS.14,67,000 WAS DI SALLOWED. AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BUT WITHOUT ANY SUCCESS. IT WAS CO NTENDED THAT THERE IS NOT EVEN AN IOTA OF ITA NO.: 184/AHD/17 ASSESSMENT YEAR: 2012-13 PAGE 2 OF 4 EVIDENCE TO SUGGEST THAT THE REMUNERATION PAID TO T HE ASSESSEE WAS EXCESSIVE OR UNREASONABLE VIS--VIS FAIR MARKET VALUE OF SUCH SERVICES. THE C IT(A) WAS OF THE VIEW THAT THERE IS NO MATERIAL ON RECORD TO SHOW THAT THE ASSESSEE AND TH E RECIPIENT OF THE DIRECTORS REMUNERATION WERE IN THE SAME BRACKET AND THAT THERE WAS NO TAX EVASION. HE FURTHER OBSERVED THAT THERE IS NO NEED FOR HIM (THE ASSESSING OFFICER) TO PROVE THE MARKET VALUE OF THE SERVICES AS WAS H ELD BY HONBLE GUJARAT HIGH COURT IN THE CASE OF CORONA TION FLOUR MILLS VS ACIT [(2010) 188 TAXMAN 257 (GUJ)]. THE DISALLOWANCE WAS THUS CONFIR MED. THE ASSESSEE IS NOT SATISFIED AND IS IN FURTHER APPEAL BEFORE US. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE AP PLICABLE LEGAL POSITION. 5. WE FIND THAT LEARNED CIT(A)S RELIANCE ON THE CA SE OF CORONATION FLOUR MILLS (SUPRA) WAS CLEARLY ILL CONCEIVED INASMUCH AS IN THAT CASE, THEIR LORDSHIPS WERE DEALING WITH A SITUATION IN WHICH THE EXPENDITURE (WAS HELD) TO BE EXCESSIVE HAVING REGARD TO THE LEGITIMATE NEEDS OF THE BUSINESS. THE DISALLOWANCE WAS THUS N OT ON THE GROUND THAT THE EXPENDITURE WAS UNREASONABLE OR EXCESSIVE, AS IN THIS CASE. IT WAS IN THIS CONTEXT THAT THEIR LORDSHIPS HAD OBSERVED AS FOLLOWS: IN RELATION TO THE DISALLOWANCE UNDER THE PROVISION S OF SECTION 40A(2) OF THE ACT, A PLAIN READING OF THE PROVISION REVEALS THAT WHERE AN ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT IS REQUIRED TO BE MADE OR HAS BEEN MADE TO ANY PERSON REFERRED TO IN CLAUSE (B) OF SEC TION 40A(2) OF THE ACT AND THE ASSESSING OFFICER IS OF THE OPINION THAT SUCH EXPEN DITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO (A) FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE; OR (B) TH E LEGITIMATE NEEDS OF THE BUSINESS OF THE ASSESSEE; OR (C) THE BENEFITS DERIV ED BY OR ACCRUING TO THE ASSESSEE ON RECEIPT OF SUCH GOODS, SERVICES OR FACILITIES, T HEN THE ASSESSING OFFICER SHALL NOT ALLOW AS A DEDUCTION SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY THE ASSESSING OFFICER TO BE EXCESSIVE OR UNREASONABLE. THEREFORE, IT BECOMES APPARENT THAT THE ASSESSING OFFICER IS REQUIRED TO RECORD A FINDING AS TO WHETHER THE EXPENDITURE IS EXCESSIVE OR UNREASONABLE IN REL ATION TO ANY ONE OF THE THREE REQUIREMENTS PRESCRIBED, WHICH ARE INDEPENDENT AND ALTERNATIVE TO EACH OTHER. ALL THE THREE REQUIREMENTS NEED NOT EXIST SIMULTANE OUSLY. IN A GIVEN CASE, IF ANY ONE CONDITION IS SHOWN TO BE SATISFIED THE PROVISIO N CAN BE INVOKED AND APPLIED, IF THE FACTS SO WARRANT. THE CONTENTION RAISED ON BEHA LF OF THE APPELLANT-ASSESSEE THAT THE FAIR MARKET VALUE HAVING NOT BEEN ASCERTAI NED BY THE ASSESSING OFFICER NO DISALLOWANCE COULD HAVE BEEN MADE, THEREFORE, DO ES NOT MERIT ACCEPTANCE. AS ALREADY NOTED HEREINBEFORE, THE ASSESSING OFFICER H AS HELD A PART OF THE EXPENDITURE TO BE EXCESSIVE HAVING REGARD TO THE LE GITIMATE NEEDS OF THE BUSINESS AND FOR RECORDING SUCH A FINDING COGENT REASONS ARE ASSIGNED BY THE ASSESSING OFFICER . 6. THE OBSERVATIONS SO MADE BY HONBLE JURISDICTION AL HIGH COURT AS THUS NOT RELEVANT IN THE PRESENT CONTEXT, I.E. WHEN DISALLOWANCE IS SOUG H TO BE MADE ON THE GROUND THAT THE PAYMENT IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE SERVICES. THE ASSESSMENT ORDER, AT PAGE 3, SPECIFICALLY STATE S, IN AS MANY WORDS, THAT THE PAYMENT FOR REMUNERATION TO DIRECTORS WAS EXCESSIVE AND UNREAS ONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF GOODS, SERVICES OR FACILITIES ETC. THE CA SE BEFORE HONBLE HIGH COURT WAS A CASE IN ITA NO.: 184/AHD/17 ASSESSMENT YEAR: 2012-13 PAGE 3 OF 4 WHICH A PART OF THE EXPENDITURE TO BE EXCESSIVE HAVING RE GARD TO THE LEGITIMATE NEEDS OF THE BUSINESS- A SITUATION MATERIALLY DIFFERENT FROM THE SITUATION BEFORE US. 7. QUITE TO THE CONTRARY OF WHAT HAS BEEN CANVASSED BY THE LEARNED CIT(A), HONBLE JURISDICTIONAL HIGH COURT, AFFIRMING THE VIEWS ARTI CULATED BY A COORDINATE BENCH OF THIS TRIBUNAL, HAS HELD THAT A FINDING ABOUT THE FAIR MA RKET VALUE OF THE GOODS, SERVICES OR FACILITIES IS A SINE QUA NON FOR MAKING A DISALLOWANCE UNDER THE RELATED LIMB O F SECTION 40A(2)(B). THE OBSERVATIONS MADE BY HONBLE JURISDICTIONAL HIGH CO URT, IN THE CASE OF [CIT VS ASHOK J PATEL (2014) 43 TAXMANN.COM 227 (GUJARAT)] , ARE AS FOLLOWS: .CONSIDERING THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT AND THE EVIDENCE ACT, IF THE AO WAS OF THE OPINION THAT THE PAYMENT FOR WHICH DISALLOWANCE IS CLAIMED, IS EXCESSIVE OR UNREASONAB LE. IN THAT CASE, IT WAS FOR THE AO TO ASSESS FAIR MARKET PRICE AND GIVE COMPARATIVE INSTANCES FOR PAYMENT FOR SIMILAR TRANSPORT SERVICE. IN ABSENCE OF SUCH COMPA RATIVE CASES BROUGHT ON RECORD, AS RIGHTLY OBSERVED BY THE ITAT IT WAS NOT OPEN FOR THE AO TO MAKE DISALLOWANCE UNDER SECTION 40A(2)(B) OF THE ACT. WH ILE DELETING DISALLOWANCE MADE BY THE AO UNDER SECTION 40A(2)(B) OF THE ACT, THE LEARNED ITAT HAS OBSERVED AND HELD IN PARA 7 AS UNDER : '7. IT IS PLAIN ON PRINCIPLE THAT, SO FAR AS DISALL OWANCE UNDER SECTION 40A(2) FOR PAYMENT BEING EXCESSIVE OR UNREASONABLE CAN ONL Y BE MADE WHEN THE PAYMENT IS MADE TO THE 'SPECIFIED PERSONS' UNDER CL AUSE 40A(2)(B) AND 'THE ASSESSING OFFICER IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET PRICE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE'. THE O PINION OF THE ASSESSING OFFICER FOR THE EXPENDITURE BEING EXCESSIVE OR UNRE ASONABLE IS TO BE FORMED VIS-A-VIS FAIR MARKET PRICE OF SUCH GOODS SERVICES OR FACILITIES. IT IS THUS SINE QUA NON FOR MAKING A DISALLOWANCE UNDER SECTION 40( A)(2) THAT THE ASSESSING OFFICER HAS TO ASCERTAIN THE FAIR MARKET PRICE OF SUCH GOODS, SERVICES OR FACILITIES, AND THEN MAKE A 'DISALLOWAN CE FOR THE AMOUNT WHICH IS IN EXCESS OF FAIR MARKET VALUE OF SUCH GOODS, SERVI CES OR FACILITIES. UNLESS THERE IS A CATEGORICAL FINDING ABOUT THE 'FAIR MARK ET VALUE' AND THE ASSESSEE HAS AN OPPORTUNITY TO BE HEARD ON ASSESSING OFFICER 'S FINDING ABOUT SUCH 'FAIR MARKET VALUE', THERE CANNOT BE AN OCCASION TO MAKE A DISALLOWANCE UNDER SECTION 40A(2). THE VERY SCHEME OF SECTION 40 A(2) DOES NOT ENVISAGE AN ADHOC DISALLOWANCE AS HAS BEEN MADE IN THE PRESE NT CASE. FOR THIS SHORT REASON ALONE, THE IMPUGNED DELETION OF DISALLOWANCE MUST STAND CONFIRMED. THERE IS, HOWEVER, ONE MORE REASON FOR DOING SO. AS EVIDENT FROM A PLAIN READING OF THE ASSESSMENT ORDER, THE ASSESSING OFFI CER, HAD CALLED UPON THE ASSESSEE TO DEMONSTRATE THAT THE PAYMENT MADE BY TH E ASSESSEE TO THE SPECIFIED PERSONS IS NOT UNREASONABLE OR EXCESSIVE, AND IT IS THUS FAILURE OF THE ASSESSEE WHICH HAS RESULTED IN DISALLOWANCE UND ER SECTION 40A(2). HOWEVER, PROVING A NEGATIVE, AS THE ASSESSEE HAS BE EN CALLED UPON TO DO IN THIS CASE, IS AN IMPOSSIBLE ONUS TO PERFORM. IN ANY EVENT, THIS ONUS IS ON THE ASSESSING OFFICER AND THE AO HAS FAILED TO DISCHARG E THE SAID ONUS. FOR THIS REASON ALSO, THE DISALLOWANCE IS UNSUSTAINABLE IN L AW. AS REGARDS THE DISCREPANCY IN THE FIGURES OF THE TAX AUDIT REPORT AND THE ASSESSEE, NEITHER SUCH A SITUATION CAN BE A REASON ENOUGH TO MAKE A D ISALLOWANCE UNDER ITA NO.: 184/AHD/17 ASSESSMENT YEAR: 2012-13 PAGE 4 OF 4 SECTION 40A(2) NOR THE ONUS OF EXPLAINING SUCH A VA RIATION IS ON THE ASSESSEE. A TAX AUDITOR IS AN INDEPENDENT PROFESSIONAL AND AN Y ERRORS IN HIS REPORT CANNOT BE PUT TO ASSESSEE'S DISADVANTAGE. IN VIEW O F THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF THE CASE, WE APPRO VE THE CONCLUSIONS ARRIVED AT BY THE CIT(A) AND DECLINE TO INTERFERE I N THE MATTER.' WE ARE IN COMPLETE AGREEMENT WITH THE VIEW TAKEN BY THE ITAT AND THE OBSERVATIONS MADE BY THE LEARNED ITAT WHILE DELETIN G DISALLOWANCES MADE BY THE AO UNDER SECTION 40A(2) (B) OF THE ACT ON MOTOR BUS RENT. NO ERROR HAS BEEN COMMITTED BY THE LEARNED ITAT WHICH CALLS FOR INTER FERENCE OF THIS COURT. NO QUESTION OF LAW MUCH LESS ANY SUBSTANTIAL QUESTION OF LAW ARISES. 8. LEARNED CIT(A) WAS THUS CLEARLY IN ERROR IN HIS APPROACH ON THE FUNDAMENTAL PRINCIPLE. 9. IN THE PRESENT CASE, THERE IS NO FINDING W HATSOEVER ABOUT THE FAIR MARKET VALUE OF THE SERVICES RENDERED BY THE DIRECTORS. THE ONLY REASON FOR MAKING THE DISALLOWANCE IS THAT ENHANCEMENT IN DIRECTORS FEES IS NOT COUPLED WITH CORRESPONDING INCREASE IN TURNOVER OR PROFITABILITY BUT THAT IS WHOLLY IRRELEVANT IN THE CONTEXT OF SECTION 40A(2). IT IS A FACT THAT THERE WAS NO REVISION OF REMUNERATION IN THE LAST 5 YEARS AND THAT THERE IS NO FINDING THAT THE REMUNERATION, POST THIS REVISION, WAS EXCESSIVE OR UNREASONABLE VIS--VIS FAIR MARKET PRICE OF SUCH SERVICES. IN THESE CIRCUMSTANCES, THE VERY FOU NDATION OF THE IMPUGNED DISALLOWANCE IS DEVOID OF LEGALLY SUSTAINABLE MERITS. FOR THIS SHOR T REASON ALONE, THE IMPUGNED DISALLOWANCE OF RS 14,67,000 MUST STAND DELETED. 10. IN VIEW OF THE ABOVE DISCUSSIONS, AND BEA RING IN MIND ENTIRETY OF THE CASE, WE DEEM IT FIT AND PROPER TO DELETE THE IMPUGNED DISALLOWANCE OF RS 14,67,000 UNDER SECTION 40A(2) IN RESPECT OF REMUNERATION PAID TO THE DIRECTORS. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. 15. IN THE RESULT, THE APPEAL IS ALLOWED I N THE TERMS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT TODAY ON THE 4 TH DAY OF MARCH, 2019. SD/- SD/- JUSTICE P P BHATT PRAMOD KUMAR (PRESIDENT) (VI CE PRESIDENT) AHMEDABAD, DATED THE 4 TH DAY OF MARCH, 2019 COPIES TO: (1) THE APPELLANT (2) THE RESPOND ENT (3) CIT (4) CIT(A) (5) DR (6) GUARD FILE BY ORDER TRUE COPY ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCHES, AHMEDABAD