DCIT, CHENNAI V. M/s. Object Frontier Software P. Ltd., CHENNAI

ITA 1888/CHNY/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 58144 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 4 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-03-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 19-03-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 10-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: G NANDHA KUMAR
• Assessee Lawyers: S SRIDHAR
• Keywords: Unexplained cash credit; Business expenditure
• Section: 68; 37

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL CHENNAI B BENCH, CHENNAI. BEFORE DR. O.K. NARAYANAN, VICE-PRESIDENT & SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER I.T.A. NO. 1888/MDS/2010 ASSESSMENT YEAR: 2004-05 THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE V(1), CHENNAI. VS. M/S. OBJECT FRONTIER SOFTWARE P. LTD., 7, 1 ST FLOOR, WELLINGTON ESTATE, 53, ETHIRAJ SALAI, EGMORE, CHENNAI 8. [PAN: AAACO3373P] (APPELLANT) (RESPONDENT) REVENUE BY : SHRI G. NANDHA KUMAR, JCIT ASSESSEE BY : SHRI S. SRIDHAR, ADVOCATE DATE OF HEARING : 19.03.2012 DATE OF PRONOUNCEMENT : 27.03.2012 ORDER PER CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER THIS IS AN APPEAL FILED BY THE DEPARTMENT AGAINST T HE ORDER OF THE CIT(A) V, CHENNAI DATED 20.08.2010 IN ITA NO.594/20 06-07 RELEVANT TO THE ASSESSMENT YEAR 2004-05. SHRI G. NANDHA KUMAR, JCIT REPRESENTED ON BEHALF OF THE REVENUE AND SHRI S. SRIDHAR, ADVOCATE REPRESENTED ON BEHALF OF THE ASSESSEE. 2. THE DEPARTMENT HAS RAISED FIVE GROUNDS OF WHICH , GROUND NO. 1 AND 5 ARE GENERAL IN NATURE AND REQUIRES NO ADJUDICATION BY US. I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1888 1888 1888 1888/M/ /M/ /M/ /M/10 1010 10 2 3. GROUND NOS. 2.1, 2.2 AND 2.3 RELATES TO DISALLO WANCES OF ` .14.00 LAKHS AND ` .2,42,000/- OUT OF SALARIES TO EMPLOYEES, WHICH WAS ALLOWED BY THE CIT(A). 4. THE ASSESSING OFFICER WHILE COMPLETING THE ASSE SSMENT DISALLOWED ` .14.00 LAKHS OUT OF SALARY EXPENDITURE OF ` .1,08,54,446/- AS EXCESSIVE AND NOT INCURRED FOR THE PURPOSE OF BUSINESS. THE ASSES SING OFFICER NOTICED THAT THE ASSESSEE HAS CLAIMED EXPENDITURE TOWARDS SALARY AT ` .1,08,54,446/- DURING THIS ASSESSMENT YEAR AS AGAINST ` .74,08,865/- INCURRED IN THE PRECEDING ASSESSMENT YEAR AND THEREFORE HELD THAT E XCESS EXPENDITURE WAS INCURRED BY WAY OF SALARIES DURING THIS ASSESSMENT YEAR. 5. THE ASSESSING OFFICER ALSO DISALLOWED SALARY OF ` .2,42,000/- PAID TO ONE MR. JAMES WALTER ON THE GROUND THAT MR. JAMES W ALTER WAS A DIRECTOR OF US COMPANY M/S. OBJECT FRONTIER INC (USA) AND COULD NOT DRAWN SALARY BY HIM IN INDIAN COMPANY AND SINCE NO EXPLANATION WAS FILED BY THE ASSESSEE AS TO HOW THE SALARY PAID TO MR. JAMES WALTER IS AL LOWABLE UNDER SECTION 37 OF THE ACT, THE ASSESSING OFFICER DISALLOWED THE SA ME. 6. THE LD. DR SUPPORTED THE ORDER OF THE ASSESSING OFFICER AND SUBMITTED THAT THE ASSESSING OFFICER IS CORRECT IN MAKING THE SAID DISALLOWANCES. 7. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION, THERE WAS INCREASE IN EMPLOYEES FROM 36 TO 93. IT IS SUBMITTED I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1888 1888 1888 1888/M/ /M/ /M/ /M/10 1010 10 3 THAT THE BRANCH OFFICE WAS OPENED AT BANGALORE DURI NG THIS ASSESSMENT YEAR AND THERE WAS INCREASE IN SALARY EXPENDITURE IN THI S ASSESSMENT YEAR AS COMPARED TO THE PRECEDING ASSESSMENT YEAR. HE ALSO SUBMITTED THAT THE TDS WAS MADE FROM THE SALARY PAYMENTS, PAYMENT OF S ALARY WAS NOT IN DISPUTE AND THEREFORE, THERE IS NO JUSTIFICATION FO R DISALLOWANCE. HE FURTHER SUBMITTED THAT THE ASSESSING OFFICER WAS NOT CORREC T IN DISALLOWING THE EXPENDITURE OF ` .14.00 LAKHS OUT OF SALARIES PAID ON THE GROUND THA T THE BUSINESS OBTAINED FROM THE ASSESSEE FROM BANGALORE CUSTOMERS DURING THE ASSESSMENT YEAR IS ONLY ` .1,06,236/-. 8. WE HAVE HEARD BOTH THE PARTIES AND FIND THAT TH E CIT(A) CONSIDERED THIS ISSUE AT PARA 7 OF HIS ORDER, WHICH READS AS U NDER: 7. I HAVE CONSIDERED THE SUBMISSIONS AND ARGUMENT S OF THE REPRESENTATIVE. IT APPEARS FROM THE ASSESSMENT ORDE R, THE DISALLOWANCE OF ` . 14,00,000/- UNDER THE HEAD SALARY HAS BEEN ATTRIB UTED TO THE INCREASE IN THE SAID EXPENDITURE AS COMPARED TO THE EARLIER ACCOUNTING YEAR. ON A PERUSAL OF THE ASSESSMENT ORDER IT IS OB SERVED THAT THE APPELLANTS HAVE EXPLAINED THE REASON FOR THE INCREA SE IN THE SALARY EXPENDITURE AS COMPARED TO THE PREVIOUS YEAR. THE A SSESSING OFFICER HAS ALSO BEEN PROVIDED WITH THE FULL PARTICULARS OF THE SALARY BY THE APPELLANTS AND THE OFFICER HAS NOT BROUGHT ON RECOR D ANY INSTANCE OF SALARY NOT SUPPORT BY DOCUMENTARY EVIDENCE. JUST BE CAUSE THE REVENUE GENERATED FROM THE NEW BRANCH IS ONLY 1,06,236 IN T HE LAST THREE MONTHS OF THE FINANCIAL YEAR CANNOT BE A GROUND TO DISALLO W THE SALARY EXPENDITURE. THE ASSESSING OFFICER CANNOT STEP INTO THE SHOES OF THE BUSINESSMAN AND, NECESSARILY, INVESTMENT HAS TO BE MADE IN A BUSINESS TO REAP BENEFITS LATER ON. THAT BEING THE CASE AND ALSO CONSIDERING THE PRINCIPLE LAID DOWN BY COURTS WITH REGARD TO THE AL LOWABILITY OF GENUINE BUSINESS EXPENDITURE IN THE JUDGMENTS RELIED UPON B Y THE APPELLANTS, I HOLD THE DISALLOWANCE OF ` . 14,00,000/- IS UNCALLED FOR AND I ACCORDINGLY DIRECT HIM TO DELETE THE DISALLOWANCE. I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1888 1888 1888 1888/M/ /M/ /M/ /M/10 1010 10 4 9. THE LD. DR COULD NOT ABLE TO CONTROVERT THE FIN DINGS OF THE CIT(A) AND WE FIND NO JUSTIFIABLE REASON TO INTERFERE WITH THE ORDER OF THE CIT(A). THEREFORE, WE DISMISS THE GROUND OF APPEAL OF THE R EVENUE ON THIS ISSUE AND CONFIRM THE ORDER OF THE LD. CIT(A). 10. WITH REGARD TO GROUND NO. 3, REGARDING DISALLO WANCE OF SALARY PAID TO MR. JAMES WALTER, THE CIT(A) HAS OBSERVED IN PARAS 8 AND 9, WHICH READS AS UNDER: 8. REGARDING THE DISALLOWANCE OF SALARY OF ` . 2,42,400/- TO MR. JAMES WALTER THE REPRESENTATIVE VEHEMENTLY ARGUED T HAT THE PAYMENT OF SALARY CONSTITUTED GENUINE BUSINESS EXPENDITURE AND HAD NEXUS TO THE BUSINESS ACTIVITY. IT WAS SUBMITTED THAT THE TAX WA S DEDUCTED AT SOURCE ON THE SALARY PAID TO MR. JAMES WALTER, WHO HAS BEE N WORKING AS CHIEF EXECUTIVE OFFICER OF THE COMPANY WITH EFFECT FROM 0 1.10.2003. FORM NO.16 WAS ALSO ISSUED TO THE PAYEE WHICH ITSELF PRO VES THE BONAFIDE OF THE PAYMENT. A PERUSAL OF THE ASSESSMENT ORDER ALSO INDICATES THAT THE ASSESSING OFFICER HAS NOT DISPUTED THE FACT OF PAYM ENT OF SALARY. HE HAS ONLY INDICATED THAT THE PAYMENT OF SALARY TO JAMES WALTER COULD NOT BE CONSIDERED AS A ALLOWABLE BUSINESS EXPENDITURE AS M R. JAMES WALTER HAPPENED TO BE DIRECTOR OF THE US COMPANY AND HE CA NNOT BE PAID SALARY IN INDIA. IT HAS BEEN POINTED AT THE TIME OF HEARING BEFORE ME THAT THE SAID MR. JAMES WALTER WAS THE CEO OF THE A PPELLANTS COMPANY AND THE APPELLANTS WERE EXPORTING THEIR SERVICES TO OBJECT FRONTIER INC (USA) AND MR. JAMES WALTER HAPPENED TO BE A DIRECTO R OF THE US COMPANY. DUE TO THE EXIGENCIES OF THE BUSINESS REQU IREMENTS OF THE APPELLANTS COMPANY, HE WAS APPOINTED AS A CEO. IT H AS ALSO SUBMITTED THAT THE FACT OF BEING A DIRECTOR IN US COMPANY CAN NOT STAND IN THE WAY I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1888 1888 1888 1888/M/ /M/ /M/ /M/10 1010 10 5 OF ALLOWABILITY OF SALARY PAID TO AN EMPLOYEE SO LO NG AS SUCH PERSON RENDERS SERVICES TO THE COMPANY AND THE COMPANY PAY SALARY FOR SUCH EMPLOYMENT. 9. CONSIDERING THE FACT THAT THE ASSESSING OFFICER HAS NOT DISPUTED THE FACT OF RENDERING OF SERVICES BY MR. JAMES WALT ER AND ALSO CONSIDERING THE FACT THAT SALARY WAS PAID AND THE T AX WAS DEDUCTED AT SOURCE FOR THE PAYMENT OF SALARY BY THE APPELLANTS, I HOLD THE VIEW THAT THE SALARY PAID TO MR. JAMES WALTER DOES NOT WARRAN T ANY DISALLOWANCE IN THE LIGHT OF RATIO OF JUDGMENTS CITED BY THE APP ELLANTS. 11. WE FIND NO JUSTIFIABLE REASON TO INTERFERE WITH THE ORDER OF THE CIT(A), THEREFORE, WE DISMISS THE GROUND OF APPEAL OF THE R EVENUE ON THIS ISSUE AND CONFIRM THE ORDER OF THE LD. CIT(A). 12. THE LAST ISSUE IN GROUND NO. 4 RELATES TO DELE TION OF ADDITION OF ` .3.85 LAKHS MADE UNDER SECTION 68. THE ASSESSING OFFICER ADDED ` .3.85 LAKHS AS UNEXPLAINED CASH CREDITS REPRESENTING LOANS RAISED BY THE ASSESSEE FROM VARIOUS PERSONS. AS THE ASSESSEE DID NOT PRODUCE LO AN CONFIRMATION LETTERS, THE ASSESSING OFFICER TREATED THE SAME AS UNEXPLAIN ED CASH CREDITS UNDER SECTION 68 OF THE ACT. 13. THE LD. DR SUBMITTED THAT THE CIT(A) DELETED T HE ADDITION MADE UNDER SECTION 68 WITHOUT GIVING ANY REASONABLE OPPORTUNIT Y TO THE ASSESSING OFFICER TO EXAMINE THE EVIDENCES PRODUCED BY THE AS SESSEE BEFORE THE I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1888 1888 1888 1888/M/ /M/ /M/ /M/10 1010 10 6 CIT(A) AND THEREFORE, IS IN VIOLATION OF RULE 46A O F THE ACT. ON MERITS, HE SUPPORTED THE ORDER OF THE ASSESSING OFFICER. 14. THE LD. AR OF THE ASSESSEE RELIED ON THE ORDER OF THE CIT(A) AND SUBMITTED THAT ALL THE PARTICULARS OF LOANS WERE FU RNISHED BEFORE THE ASSESSING OFFICER AND THEREFORE SUBMITTED THAT THE CIT(A) IS JUSTIFIED IN DELETING THE ADDITION MADE UNDER SECTION 68 OF THE ACT. 15. WE HAVE HEARD BOTH THE SIDES, PERUSED THE ORDE RS OF LOWER AUTHORITIES AND MATERIAL AVAILABLE ON RECORD. THE CIT(A) DELETE D THE ADDITION ON THE GROUND THAT THE LOANS WERE RECEIVED BY THE ASSESSEE THROUGH ACCOUNT PAYEE CHEQUES AND REPAYMENTS WERE MADE THROUGH ACCOUNT PA YEE CHEQUES ONLY ALONG WITH INTEREST. THE CIT(A) ADMITTED THE EVIDEN CES FILED BY THE ASSESSEE IN THE FORM OF ACCOUNT COPIES OF LOAN CREDITORS, CO PIES OF THE DISCHARGED PRO- NOTES, COPIES OF RELEVANT BANK STATEMENTS EVIDENCIN G THE RECEIPT OF THE LOAN AND REPAYMENT OF LOAN AND INTEREST, ETC. THE CIT(A) ALSO OBSERVED THAT THE TDS ON INTEREST WAS ALSO MADE BY THE ASSESSEE AND W AS REMITTED TO THE GOVERNMENT ACCOUNT. 16. IN OUR CONSIDERED VIEW, THE CIT(A) SHOULD HAVE CALLED FOR A REMAND REPORT BEFORE ADJUDICATING THE ISSUE ON MERITS AS D ETAILS WHICH WERE FILED BEFORE THE CIT(A) WERE NOT FILED BEFORE THE ASSESSI NG OFFICER AT THE TIME OF COMPLETION OF ASSESSMENT. THEREFORE, WE FEEL THAT T HIS MATTER SHOULD GO I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1888 1888 1888 1888/M/ /M/ /M/ /M/10 1010 10 7 BACK TO THE FILE OF THE ASSESSING OFFICER FOR EXAMI NING THE ISSUE AFRESH IN ACCORDANCE WITH LAW AFTER GIVING ADEQUATE OPPORTUNI TY TO THE ASSESSEE. THEREFORE, WE SET ASIDE THE ORDER OF CIT(A) ON THIS ISSUE AND DIRECT THE ASSESSING OFFICER TO EXAMINE THE ISSUE AFRESH. THIS GROUND OF APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSE. 17. IN THE RESULT, THE APPEAL OF THE DEPARTMENT IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 27.03.2012. SD/- SD/- (DR. O.K. NARAYANAN) VICE-PRESIDENT (CHALLA NAGENDRA PRASAD) JUDICIAL MEMBER CHENNAI, DATED, THE 27.03.2012 VM/- TO: THE ASSESSEE//A.O./CIT(A)/CIT/D.R.