Orange Associates Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 2091/DEL/2017

• Counselvise Citation: [2021] 109 COUNSELVISE.COM (IT) 9410 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 8 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-01-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: 2012-2013
• Appeal Filed On: 07-04-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Principle of natural justice

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH E: NEW DELHI (THROUGH VIDEO CONFERENCING) BEFORE, SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO.2091/DEL/2017 (ASSESSMENT YEAR 2012-13) ORANGE ASSOCIATES PVT. LTD. (FORMERLY ONE SOURCE EDUCATION PVT. LTD.) 9, NEAR TELEPHONE EXCHANGE, DARYAGANJ, NEW DELHI-110 002. PAN AAACS 1177K VS. ASST. CIT, CIRCLE-22(1), NEW DELHI (APPELLANT) (RESPONDENT) APPELLANT BY SH. TANPREET KOHLI, CA. RESPONDENT BY MS. RAKHI VIMAL, SR. DR DATE OF HEARING 05.01.2021 DATE OF PRONOUNCEMENT 05.01.2021 ORDER PER SUDHANSHU SRIVASTAVA, JM: THIS APPEAL IS PREFERRED BY THE ASSESSEE AGAINST OR DER DATED 19.01.2017 PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-8, NEW DELHI {CIT(A)} FOR ASSESSMENT YEAR 2012-13. 2 ITA NO.2091/DEL/2017 ORANGE ASSOCIATES PVT. LTD. V S. ASST. CIT THE SOLE GRIEVANCE OF THE ASSESSEE IS UPHOLDING THE DISALLOWANCE OF RS.12,60,000/- U/S 40A (2) (B) OF THE INCOME TAX AC T, 1961 (HEREINAFTER CALLED THE ACT). 2.0 THE BRIEF FACTS OF THE CASE ARE THAT THE AS SESSEE COMPANY IS ENGAGED IN THE BUSINESS OF PUBLISHING BOOKS FOR THE SCHOOL STUDENTS. THE RETURN OF INCOME WAS FILED DECLARING TAXABLE INCOME OF RS.3,99,96,730/-. AFTER PROCESSING OF THE RETURN , THE ASSESSEES CASE WAS SELECTED FOR SCRUTINY. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE ASSESSING OFFICER THAT THERE WAS AN EXPONENTIAL INCREASE IN THE DIRECTORS REMUNERAT ION WHEREAS THE SALARIES OF OTHER EMPLOYEES HAD REMAINED STATIC. TH E ASSESSEE HAD DEBITED RS. 84,00,000/- AS DIRECTORS REMUNERATION WHICH THE ASSESSING OFFICER HELD TO BE A COLORABLE DEVICE TO SIPHON THE PROFITS OF THE ASSESSEE COMPANY. THE ASSESSING OFFICER WAS OF THE OPINION THAT THE ASSESSEE COULD NOT JUSTIFY THE INCREASE IN THE DIRECTORS REMUNERATION. THE ASSESSING OFFICER PROCEEDED TO DI SALLOW 50% OF THE REMUNERATION I.E. RS.42 LACS AND ADDED BACK THE SAME TO THE INCOME OF THE ASSESSEE. 3 ITA NO.2091/DEL/2017 ORANGE ASSOCIATES PVT. LTD. V S. ASST. CIT 2.1 THE ASSESSEES APPEAL BEFORE THE LD. CIT (A) WAS PARTLY ALLOWED WITH THE LD. CIT (A) HOLDING THAT 50% DISALLOWANCE WAS EXCESSIVE. HE RESTRICTED THE DISALLOWANCE TO RS. 12,60,000/- WHICH IS THE SUBJECT MATTER OF THE PRESENT APPEAL BE FORE THIS TRIBUNAL. THE GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER: 1. THAT THE AUTHORITIES BELOW ERRED BOTH IN LAW AN D ON THE FACTS IN INVOKING THE PROVISIONS OF SEC.40(2)(B) IGNORING THE FACTS ON RECORD AND REJECTING THE EXPLANATION OF THE ASSESSE E IN THE SUMMARY MANNER. THUS, THE ADDITION OF RS.12,60,000. 00 AS CONFIRMED BY THE CIT(APPEALS) IS LIABLE TO BE DELET ED. 2. THAT THE AUTHORITIES BELOW ERRED BOTH IN LAW AND ON THE FACTS IN THE ESTIMATIONS OF EXCESSIVE SALARY PAID TO THE DIRECTORS @ 15% I.E. RS.15,50,000.00 OUT OF GROSS SALARY PAID O F RS.84,00,000.00 TO THE DIRECTORS IS EXCESSIVE, WRON G BASELESS AND ITS BASED ON SURMISES & CONJECTURE. THUS THE DI SALLOWANCE OF RS.12,60,000.00 IS LIABLE TO BE DELETED. 3. THAT THE ORDERS OF THE AUTHORITIES BELOW ARE B AD IN LAW AND ON THE FACTS OF THE CASE. 4. THAT THE ORDERS PASSED ARE ERRONEOUS, ILLEGAL AND AGAINST THE PRINCIPLES OF NATURAL JUSTICE AND EQUITY AS WEL L AS THE WELL SETTLED LAWS 5. THE APPELLANT MAY KINDLY BE PERMITTED TO ADD M ORE AT THE TIME OF HEARING OF APPEAL. 4 ITA NO.2091/DEL/2017 ORANGE ASSOCIATES PVT. LTD. V S. ASST. CIT 3.0 THE LD. AUTHORIZED REPRESENTATIVE SUBMITTED THAT UNDISPUTEDLY THERE WAS A SUBSTANTIAL INCREASE IN TH E SALARY OF THE DIRECTORS DURING THE YEAR UNDER CONSIDERATION BUT I T WAS TO BE APPRECIATED THAT THERE HAD BEEN NO INCREASE IN THE SALARY SINCE APRIL, 2007, WHEREAS THE FINANCIAL PERFORMANCE OF TH E COMPANY HAD IMPROVED CONSIDERABLY WITH THERE BEING A QUANTUM JUM P IN THE TURNOVER AND THE NET PROFITS OF THE ASSESSEE COMPAN Y DURING THE PRECEDING FIVE ASSESSMENT YEARS. THE LD. AUTHORIZED REPRESENTATIVE SUBMITTED THAT THE ASSESSING OFFICER HAD MADE THE D ISALLOWANCE IN AN ARBITRARY MANNER WITHOUT BRINING ON RECORD ANY CO MPARABLE CASES WHERE THE SALARY FOR SIMILAR WORK TO PEOPLE HAV ING SIMILAR QUALIFICATIONS WAS BEING PAID AT A LOWER RATE. IT WAS SUBMITTED THAT IN ABSENCE OF ANY MATERIAL BEING BROUGHT ON RECORD TO DEMONSTRATE AS TO HOW THE SALARY PAID TO THE DIRECTORS WAS EXCESS IVE OR WAS NOT COMPARABLE WITH MARKET RATES, NO PART OF SUCH REMUNE RATION COULD HAVE BEEN LEGALLY DISALLOWED IN TERMS OF SECTION 40 A (2) (B). THE LD. AUTHORIZED REPRESENTATIVE ALSO SUBMITTED THAT THE C OMPANY AS WELL AS DIRECTORS TO WHOM THE REMUNERATION HAD BEEN PAID WERE ALL IN THE HIGHEST TAX RATE BRACKET AND, THEREFORE, THE AL LEGATION OF THE 5 ITA NO.2091/DEL/2017 ORANGE ASSOCIATES PVT. LTD. V S. ASST. CIT ASSESSING OFFICER THAT THE SAME WAS A COLORABLE DEV ICE TO AVOID TAX WAS ALSO INCORRECT. 4.0 PER CONTRA, THE LD. SR. DR SUPPO RTED THE ORDERS OF THE LOWER AUTHORITIES AND VEHEMENTLY ARGUED THAT EV EN IF THE COMPARABLE CASES HAD NOT BEEN CITED BY THE ASSESSIN G OFFICER, THE FACT REMAINED THAT THERE WAS 775% INCREASE IN THE DI RECTORS REMUNERATION AND, THEREFORE, SINCE THE ASSESSEE HAD FAILED TO JUSTIFY SUCH INCREASE, DISALLOWANCE WAS VERY MUCH IN ORDER. 5.0 WE HAVE HEARD THE RIVAL SUBMISSIO NS AND HAVE ALSO PERUSED THE MATERIAL ON RECORD. UNDISPUTEDLY, THERE HAS BEEN A 775% INCREASE IN THE REMUNERATION TO THE DIRECTORS AS COMPARED TO THE EARLIER ASSESSMENT YEARS. ALL THE SAME, IT IS S ETTLED LAW THAT ALTHOUGH THE OBJECTIVE OF SECTION 40A(2) IS TO PREV ENT EVASION OF TAX THROUGH EXCESSIVE OR UNREASONABLE PAYMENTS, BUT TH IS PROVISION SHOULD NOT BE APPLIED IN A MANNER WHICH WILL CREATE H ARDSHIP IN BONA FIDE CASES. A PERUSAL OF THE ASSESSMENT ORDER SHOWS THAT THE ASSESSING OFFICER HAS NOT BROUGHT ANY COMPARABLE CA SES ON RECORD TO ESTABLISH AND BUTTRESS HIS ALLEGATION THAT THE S ALARY PAID TO THE DIRECTORS WAS EXCESSIVE AS COMPARED TO THE SALARY BE ING PAID TO 6 ITA NO.2091/DEL/2017 ORANGE ASSOCIATES PVT. LTD. V S. ASST. CIT SIMILAR PERSONS WITH SIMILAR QUALIFICATIONS AND EXPE RIENCE. THE LD. CIT (A), THOUGH HAS GIVEN PARTIAL RELIEF TO THE ASS ESSEE BY LIMITING THE DISALLOWANCE TO RS.12,60,000/-, ALSO DID NOT CO NSIDER THIS ASPECT OF THE CASE AND HAS REDUCED THE DISALLOWANCE IN AN AD HOC MANNER. IT IS ALSO UNDISPUTED THAT THE ASSESSEE COM PANY AS WELL AS DIRECTORS BOTH ARE IN THE SAME TAX BRACKET, WHICH IS THE HIGHEST IN THEIR CASES AND, THEREFORE, THERE CAN BE NO QUESTIO N OF ANY EVASION OF TAX BY PAYING REMUNERATION TO THE DIRECTORS. THE CBDT CIRCULAR NO.6-P DATED 6 TH JULY, 1968 CLEARLY STATES THAT NO DISALLOWANCE IS TO BE MADE U/S 40A (2) IN RESPECT OF PAYMENTS MADE TO RELATIVES AND SISTER CONCERNS WHERE THERE IS NO ATTEMPT TO EVADE TAX. CLEARLY NO CASE OF EVASION OF TAX CAN BE MADE OUT IN THE PRESE NT APPEAL. THIS CIRCULAR IS BINDING ON THE DEPARTMENT AND SINCE NO MOTIVE TO EVADE TAX IS ESTABLISHED AND FURTHER SINCE THE ASSESSING OFFICER HAS NOT POINTED OUT ANY COMPARABLES TO DEMONSTRATE THAT THE SALARY PAID TO DIRECTORS WAS EXCESSIVE, WE HAVE NO OPTION BUT TO S ET ASIDE THE ORDER OF THE LD. CIT (A) AND WHILE DOING SO, WE DIRE CT THE ASSESSING OFFICER TO DELETE THE ENTIRE ADDITION. WHILE DOING SO, WE PLACE RELIANCE ON THE FOLLOWING JUDICIAL PRECEDENTS: 7 ITA NO.2091/DEL/2017 ORANGE ASSOCIATES PVT. LTD. V S. ASST. CIT (A) CIT VS. SPANK HOTELS LTD., [2014] 50 TAXMANN.C OM 452 (DELHI) (B) AMIT MEHRA VS. ITO, [2020] 116 TAXMANN.COM 87 0 (DELHI TRIB.) (C) TALLY SOLUTIONS (P.) LTD. VS. DCIT, [2011] 8 IT R (1) 434 (BANGALORE) (D) ACIT VS. DOON VALLEY MOTORS, [2006] 10 SOT 525 (DELHI) (E) DIVAKAR SOLAR SYSTEM LTD. VS. DCIT, [2017] 88 T AXMANN.COM 770 (KOLKATA-TRIB.) (F) SIGMA RESEARCH & CONSULTING (P.) LTD. VS. CIT, [2019] 103 TAXMANN.COM 397 (DELHI) (G) CIT VS. INDO SAUDI SERVICES (TRAVEL), [2009] 31 0 ITR 306 (BOMBAY) (H) PCIT VS. GUJARAT GAS FINANCIAL SERVICES LTD., [ 2015] 60 TAXMANN.COM 483 (GUJARAT) (I) CIT VS. V.S. DEMPO & CO. (P.) LTD., [2010] 8 TA XMANN.COM 159 (BOMBAY) (J) CIT VS. SIYA RAM GARG (HUF), [2012] 20 TAXMANN. COM 622 (PUNJAB & HARYANA). 8 ITA NO.2091/DEL/2017 ORANGE ASSOCIATES PVT. LTD. V S. ASST. CIT 6.0 IN THE FINAL RESULT, THE APPEAL OF THE ASSESSEE STANDS ALLOWED. ABOVE DECISION WAS ANNOUNCED ON CONCLUSION OF VIRTUAL HEARING ON 5 TH JANUARY, 2021. SD/- SD/- (N.K. BILLAIYA) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 05/01/2021 PK/PS COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI