M/s.Hubli Cigarette Centre, Hubli V. Income Tax Officer, Bangalore

ITA 2175/BANG/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8494 (ITAT-BANGALORE)
• Duration Of Justice: 2 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-03-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2012-2013
• Appeal Filed On: 09-12-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Fair market value; Set aside
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 40A(3); 271(1)(b); 139; 92; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SMC - C BENCH : BANGALORE BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER ITA NO. 2175/BANG/2016 ASSESSMENT YEAR : 2012-13 M/S. HUBLI CIGARETTE CENTRE, NO. B-129, SHINDE COMPLEX, NEELIGIRI ROAD, HUBLI 580 020. PAN: AABFH 7836E VS. THE INCOME TAX OFFICER, WARD-3(2), HUBLI. APPELLANT RESPONDENT APPELLANT BY : SHRI C.R. NULVI, CA RESPONDENT BY : SHRI AR.V. SREENIVASAN, JCIT(DR) DATE OF HEARING : 23.02.2017 DATE OF PRONOUNCEMENT : 03.03.2017 O R D E R PER VIJAY PAL RAO, JUDICIAL MEMBER THE APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 29.09.2016 OF CIT(A) FOR THE ASSESSMENT YEAR 2012-1 3. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS. ITA NO. 2175/BANG/2016 PAGE 2 OF 7 2. GROUND NO. 1 IS GENERAL IN NATURE AND DOES NOT REQU IRE ANY SPECIFIC ADJUDICATION. 3. GROUND NO. 2 & 3 ARE REGARDING DISALLOWANCE OF SALA RY PAID TO THE EMPLOYEES, RELATIVES OF THE PARTNERS OF THE ASSESSE E. DURING THE COURSE OF ITA NO. 2175/BANG/2016 PAGE 3 OF 7 THE ASSESSMENT PROCEEDINGS THE AO NOTED FROM THE BO OKS OF ACCOUNTS THAT THE ASSESSEE PAID THE SALARY TO VARIOUS PERSONS AS UNDER. I. SHRI R.H. MAHINDRAKAR - RS. 8,00,000/- II. SHRI M.H. MAHINDRAKAR - RS. 4,00,000/- III. SMT. VANI.K. MAHINDRAKAR - RS. 3,50,000/- IV. NEETHA. V. MAHINDRAKAR - RS. 1,75,000/- V. ASHWIN. R. MAHINDRAKAR - RS. 1,75,000/- 4. THE AO FURTHER FOUND THAT ALL 5 PERSONS WERE RELATI VES OF THE PARTNERS OF THE ASSESSEE FIRM AND THEREFORE COVERED BY THE SECT ION 40A(2)(B) OF THE IT ACT. THE AO FURTHER NOTED THAT THE SALARY WAS ALSO PAID DURING THE YEAR TO THE PARTNERS. THUS THE AO WAS OF THE VIEW THAT THE SALARY PAID TO THESE 5 PERSONS IS EXCESSIVE HAVING REGARD TO THE FAIR MARK ET VALUE (FMV) OF THE SERVICES RENDERED BY THEM IN COMPARISON TO THE SERV ICES RENDERED BY THE PARTNERS. ACCORDINGLY, THE AO RESTRICTED THE PAYME NT OF SALARY TO THE ABOVE SAID PERSONS TO RS. 7,50,000/- AND DISALLOWED THE EXCESS PAYMENT OF RS. 15,10,000/- U/S. 40A(2)(A) OF THE ACT. THE ASS ESSEE CHALLENGED THE ACTION OF THE AO BEFORE THE CIT(A) AND CONTENTED TH AT THE ASSESSEE FIRM IS A FAMILY BUSINESS PARTNERSHIP. THE THREE PARTNERS OF THE ASSESSEE FIRM ARE SONS OF THE THREE ERSTWHILE PARTNERS AND THEREFORE THESE THREE PERSONS HAD RICH KNOWLEDGE AND EXPERIENCE IN THE FIELD OF THE B USINESS OF THE ASSESSEE FIRM AND CONTRIBUTED A LOT IN RUNNING THE BUSINESS SMOOTHLY. THUS THE ASSESSEE CONTENTED THAT THE BUSINESS OF THE ASSESSE E FIRM HAS GROWN MANIFOLD OVER THE YEARS DUE TO THE SERVICES OF THES E PERSONS. THE CIT(A) ITA NO. 2175/BANG/2016 PAGE 4 OF 7 DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE. HOW EVER, THE CIT(A) HAS RESTRICTED THE SALARY OF RS. 13,00,000/- AND CONSEQ UENTLY SUSTAIN THE ADDITION OF RS. 6,00,000/- 5. BEFORE THE TRIBUNAL THE LD. AR OF THE ASSESSEE HAS REITERATED THE CONTENTION AS RAISED BEFORE THE AUTHORITIES BELOW. HE HAS REF ERRED TO THE TURNOVER OF THE ASSESSEE FIRM OVER THE YEARS AND CONTENTED THAT FROM THE FINANCIAL YEAR 2008-09 TO THE FINANCIAL YEAR 2011-12 THE TURN OVER OF THE ASSESSEE HAS INCREASED FROM RS. 32 CRORES TO RS. 51 CRORES. THUS THE AUTHORITIES BELOW ARE NOT JUSTIFIED IN RESTRICTING THE SALARY P AYMENT TO THESE PERSONS MERELY ON THE GROUND THAT THEY ARE RELATIVES OF THE PARTNERS OF THE ASSESSEE FIRM AND WITHOUT GIVING A CONCLUSIVE FINDING THAT T HE PAYMENT TO THESE PERSONS IS EXCESSIVE IN COMPARISON TO THE SERVICES RENDERED BY THEM AS WELL AS THE COMPARABLE PAYMENT OF SALARY. 6. THE LD. AR HAS RELIED UPON THE FOLLOWING DECISIONS. I) CIT VS FORBES TEA BROKERS 315 ITR 404 (MADRAS HIGH COURT) II) VOLTAMP TRANSFORMER PVT. LTD. VS CIT 129 ITR 105 III) NEHA PROTEINS LTD. VS ACIT 83 TTJ 236 (I.T.A.T. JOD HPUR TRIBUNAL) ITA NO. 2175/BANG/2016 PAGE 5 OF 7 ON THE OTHER HAND THE LD. DR HAS RELIED UPON THE OR DERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THERE IS NO DI SPUTE THAT ALL THESE 5 PERSONS ARE RELATIVES OF THE PARTNERS OF THE ASSESS EE FIRM AND THEREFORE THE PROVISIONS OF SECTION 40A(2A) ARE APPLICABLE IN THI S CASE. THE AO FOUND THAT THE SALARY PAID TO THESE PERSONS IS MUCH MORE THAN THE SALARY PAID TO THE PARTNERS OF THE ASSESSEE FIRM. THEREFORE COMPA RING THE SERVICES OF THE PARTNERS THE SALARY PAID TO THESE PERSONS ARE EXCES SIVE. 7. HAVING CONSIDERED THE RIVAL SUBMISSIONS AND RELEVAN T MATERIAL ON RECORD, IT IS NOTED THAT THE AO HAS CONSIDERED THE SALARY P AID TO THESE 5 PERSONS WHO ARE RELATIVES OF PARTNERS OF ASSESSEE FIRM IS E XCESSIVE AND THEREFORE RESTRICTED THE SALARY ON ESTIMATE BASIS TO RS. 7,50 ,000/- AND DISALLOWED THE EXCESS PAYMENT OF RS. 15,10,000/-. THE CIT(A) GRAN TED PART RELIEF TO THE ASSESSEE BY ALLOWING THE REMUNERATION TO THESE 5 PE RSONS OF RS. 13 LAKHS INSTEAD OF RS. 7,50,000/- BY THE AO. THUS THE ADDI TION SUSTAINED BY THE CIT(A) IS RS. 6,00,000/-. BOTH AO AS WELL AS CIT(A ) HAVE ESTIMATED THE SALARY FOR DETERMINING THE EXCESS / UNREASONABLE PA YMENT WITHOUT CONSIDERING THE FMV OF THE SERVICES PROVIDED BY THE SE PERSONS. THE AO WHILE INVOKING THE PROVISIONS OF SECTION 40A(2)(A) CONSIDERED THE FMV OF THE SERVICES BY COMPARING THE SALARY PAID TO THE PA RTNERS. WHEREAS IT IS NOT ASCERTAINABLE FROM THE RECORD WHETHER THE SERVI CES RENDERED BY THESE ITA NO. 2175/BANG/2016 PAGE 6 OF 7 PERSONS CAN BE COMPARED WITH THE SERVICES OF THE PA RTNERS TO WHOM THE SALARIES WERE PAID BY THE ASSESSEE FIRM. IT IS PER TINENT TO NOTE THAT THE COMPARISON WOULD HAVE BEEN MORE PROPER IF THE SALAR Y PAID TO THE UNRELATED EMPLOYEES OF THE ASSESSEE FIRM WAS TO BE CONSIDERED AS FMV OF THE SERVICES PROVIDED BY THESE PERSONS. THEREFORE THIS ISSUE HAS NOT BEEN PROPERLY EXAMINED BY THE AUTHORITIES BELOW AND REQU IRES TO BE RECONSIDERED IN THE LIGHT OF THE ABOVE OBSERVATION. HENCE THIS ISSUE IS SET ASIDE TO THE RECORD OF AO FOR RE-COMPUTATION OF THE FMV OF THE SERVICES PROVIDED BY THESE PERSONS HAVING REGARD TO THE SALA RIES PAID TO THE NON- RELATED EMPLOYEES OF THE ASSESSEE FIRM INSTEAD OF T HE PARTNERS OF THE ASSESSEE FIRM WHO CANNOT BE CONSIDERED AS UNRELATED PARTY. 8. GROUND NO. 4 & 5 ARE REGARDING DISALLOWANCE OF RS. 2 LAKHS U/S. 40A(3) OF THE ACT. THE AO NOTED THAT THE ASSESSEE HAS MAD E CASH PAYMENT OF RS. 2 LAKHS TO A SISTER CONCERN VIZ., M/S. RISINGSU N AGENCIES. THE ASSESSEE EXPLAINED THAT THE TRANSACTION WAS ROOTED THROUGH ACCOUNTS OF ONE OF THE PARTNERS AND IT WAS DONE DUE TO BUSINESS EXI GENCY. THE AO WAS NOT CONVINCED WITH THE EXPLANATION OF THE ASSESSEE AND HELD THAT IT WAS DISALLOWABLE AS PER SECTION 40A(3). THE ASSESSEE C HALLENGED THE ACTION OF THE AO BEFORE THE CIT(A). HOWEVER, THE CIT(A) DISM ISSED THE GROUND OF THE ASSESSEE ON THIS ISSUE. ITA NO. 2175/BANG/2016 PAGE 7 OF 7 9. I HAVE HEARD THE LD. AR AS WELL AS THE LD. DR AND C ONSIDERED THE RELEVANT MATERIAL ON RECORD. IT APPEARS THAT THIS AMOUNT OF RS. 2 LAKHS WAS PAID TO THE SISTER CONCERN THROUGH THE PARTNERS ACCOUNT. HOWEVER, THE ASSESSEE HAS NOT CLAIMED THIS AMOUNT AS AN EXPENDITURE. THE REFORE THE PROVISIONS OF SECTION 40A(3) CANNOT BE INVOKED IN THE ABSENCE OF ANY CLAIM OF EXPENDITURE. IN VIEW OF THE ABOVE FACT THAT THIS A MOUNT WAS NOT CLAIMED AS AN EXPENDITURE, NO DISALLOWANCE IS CALLED FOR U/ S. 40A(3). ACCORDINGLY, THIS DISALLOWANCE MADE BY THE AO IS DELETED. 10. IN THE RESULT THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 3 RD DAY OF MARCH, 2017. SD/- (VIJAY PAL RAO) JUDICIAL MEMBER BANGALORE, DATED, THE 3 RD MARCH, 2017. / MS/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.