Second Leasing Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 2412/DEL/2013

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 3078 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-05-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 11-05-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 25-04-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business expenditure; Maximum Marginal Rate; Commercial expediency
• Section: 143(3); 142(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH G, NEW DELHI BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO. 2412/DEL/2013 AY. 2009-10 M/S SECOND LEASING PVT. LTD., FLAT NO. N, SAGAR APARTMENT, 6, TILAK MARG, NEW DELHI 11 001 (PAN: AABCS6609R) VS. DCIT, CIRCLE-8(1), NEW DELHI (APPELLANT) (RESPONDENT) ASSESSEE BY : SH. VED JAIN, ADV. & MS. RANO JAIN, ADV. DEPARTMENT BY : SH. N.K. BANSAL, SR. DR ORDER PER H.S. SIDHU, JM ASSESSEE HAS FILED THE APPEAL AGAINST THE ORDER DATED 2 3.2.2013 PASSED BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS)X I, NEW DELHI PERTAINING TO ASSESSMENT YEAR 2009-10 2. THE GROUNDS RAISED BY THE ASSESSEE READ AS UNDER:- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ORDER PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S) [CIT(A)] IS BAD BOTH IN THE EYE OF LAW AND ON FACTS. 2 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED BOTH ON FACTS AND IN LAW IN CONFIRMI NG THE DISALLOWANCE OF RS. 27,50,OO0/- MADE BY THE AO ON ACCOUN T OF REMUNERATION PAID TO THE DIRECTOR. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED BOTH ON FACTS AND IN LAW IN ENHANCING THE INCOME OF THE ASSESSEE BY MAKING DISALLOWANCE OF AN AMOUN T OF RS.88,75,000/- ON ACCOUNT OF REMUNERATION PAID TO THE DIRECTOR AS AGAINST RS.27,50,000/- MADE BY THE ASSESSING OFFICER. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED BOTH ON FACTS AND IN LAW IN MAKING D ISALLOWANCE OF RS.88,75,000/- ON ACCOUNT OF SALARY AND BONUS PAID T O THE DIRECTOR. 5. THAT THE DISALLOWANCE HAS BEEN MADE DESPITE THE ASSESSE E BRINGING ALL MATERIAL AND EVIDENCES ON RECORD AND IGNORING THE SPIR IT OF THE PROVISION OF SECTION 40A(2). 6. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED BOTH ON FACTS AND IN LAW IN MAKING TH E SAID DISALLOWANCE ON THE BASIS OF SOME MATERIAL COLLECTED AT TH E BACK OF THE ASSESSEE WITHOUT GIVING ASSESSEE AN OPPORTUNITY TO R EBUT 3 THE SAME IN VIOLATION OF STATUTORY PROVISION OF SECTION 142(3) OF THE ACT. 7. THAT THE APPELLANT CRAVES LEAVE TO ADD, AMEND OR ALTER ANY OF THE GROUNDS OF APPEAL. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE F ILED RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 1,76,06,878/- ON 30.9. 2009 AND THE SAME WAS PROCESSED U/S. 143(1) OF THE I.T. ACT1, 1961 AT RETURNE D INCOME. THE ASSESSEES CASE WAS SELECTED FOR SCRUTINY ASSESSMENT THROUGH C ASS. NOTICE U/S. 143(2) OF THE I.T. ACT, 1961 WAS ISSUED ON 23.8.20 10 BY THE AO, FIXING THE CASE FOR 6.9.2010. ANOTHER NOTICE U/S. 142(1) OF THE I.T. ACT AND QUESTIONNAIRE WERE ISSUED TO THE ASSESSEE ON 31.1.2011 WH ICH WAS DULY SERVED THROUGH THE SPEED POST, FIXING THE CASE FOR 01.3 .2011. THE AO ASKED THE ASSESSEE TO PROVIDE DETAILS OF EXPENSES/PAYMEN TS COVERED U/S. 40A(2)(B) OF THE ACT. IN RESPONSE TO THE QUERY TH E ASSESSEE SUBMITTED VIDE LETTER DATED 13.4.2011 THAT THE DIRECTOR REMUNE RATION OF RS. 95,00,000/- PAID TO SH. ABHINAV KUMAR IS COVERED U /S. 40A(2)(B). SINCE IT WAS A NEW EXPENSE DEBITED TO THE PROFIT AND LOSS ACCO UNT AND THERE WAS NO SUCH EXPENSE IN THE LAST YEAR, THE ASSESSEE WAS FURTHER ASKED TO GIVE COPY OF BOARD RESOLUTION DECIDING SUCH A BIG REMUNERATI ON TO BE PAID TO SH. ABHINAV KUMAR. THE ASSESSEE SUBMITTED RESOLUTION FO R REMUNERATION TO DIRECTORS AS ANNEXURE A-2 TO SUBMISSION DATED 7.7.2011. ON PERUSAL OF THE 4 RESOLUTION IT WAS NOTICED BY THE AO THAT IN THE MEETI NG OF BOARD OF DIRECTORS HELD ON 1.7.2008 SH. ABHINAV KUMAR WAS DESIGNATED AS EXECUTIVE DIRECTOR AND WILL BE PAID A SALARY OF RS. 5 LACS PER MONTH W.E .F. 1.7.2008 ALONGWITH SOME PERQUISITES AND ALLOWANCE. AS PER THE DECISION OF T HE BOARD TOTAL SALARY OF SH. ABHINAV KUMAR AS EXECUTIVE DIRECTOR FOR THE YEA R UNDER CONSIDERATION COMES TO RS. 45 LACS ONLY (5 LACS X 9). THE ASSESSEE HAS N OT GIVEN DETAILS OF PERQUISITES/ALLOWANCES/EXPENSES INCURRED ON SH. ABHIVAN KUMAR, THEREFORE, IT WAS NOT POSSIBLE FOR THE AO TO CALCULATE THE EXACT AM OUNT OF SUCH EXPENSES. AO NOTED THAT HOWEVER ANY SUCH PERQUISITES/ ALLOWANCE SHOULD NOT EXCEEDS 50% OF THE TOTAL SALARY. ACCORDINGLY, A FU RTHER AMOUNT OF RS. 22,50,000/- MAY BE ALLOWED AS PERQUISITES PAID TO S H. ABHINAV KUMAR BY THE ASSESSEE. AO FURTHER NOTED THAT WITH REFERENCE TO REMUNERATION PAYMENT TO A DIRECTOR INTO ACCOUNT, THE ASSESSEE HAS MADE AN EXCESS PAYMENT OF RS. 27,50,000/- TO SH. ABHIVAN KUMAR. ACCO RDINGLY, AN AMOUNT OF RS. 27,50,000/- WAS DISALLOWED U/S. 40A(2)(B) OF T HE ACT AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE AND COMPLETED THE A SSESSMENT AT RS. 2,05,20,282/- VIDE HIS ORDER DATED 29.10.2011 PASSED U /S. 143(3) OF THE I.T. ACT, 1961. 4. AGAINST THE ASSESSMENT ORDER DATED 29.10.2011, ASSESSE E APPEALED BEFORE THE LD. CIT(A), WHO VIDE HIS IMPUGNED ORDER D ATED 23.2.2013 HAS DISMISSED THE APPEAL OF THE ASSESSEE BY CONFIRMING THE DI SALLOWANCE OF 5 RS. 27,50,000/- AND THE INCOME WAS FURTHER ENHANCED BY RS. 61,25,000/- THUS TOTALING DISALLOWANCE AMOUNTING TO RS. 88,75,000/ -. 5. AGGRIEVED WITH THE AFORESAID ORDER OF THE LD. CI T(A), ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 6. LD. COUNSEL OF THE ASSESSEE IN SUPPORT OF HIS CONTENT ION HAS FILED THE WRITTEN SYNOPSIS. FOR THE SAKE OF CONVENIENCE, WE ARE REPRODUCING THE SAME AS UNDER: 1- THIS IS AN APPEAL PREFERRED BY ASSESSEE AGAINST THE O RDER DATED 28-02-2013 PASSED BY LEARNED COMMISSIONER OF INCOM E TAX (APPEAL)-XI, WHEREBY LD. CIT(A) ENHANCED THE INCO ME OF THE ASSESSEE BY MAKING DISALLOWANCE OF AN AMOUNT OF RS.88,75,000/-- ON ACCOUNT OF REMUNERATION PAID TO TH E DIRECTOR AS AGAINST RS.27,50,000/-- MADE BY THE ASSESSING OFFICER. 2- AT THE VERY OUTSETS THIS IS SUBMITTED THAT, EXPENDI TURE CLAIMED BY THE ASSESSEE COMPANY ON THE ACCOUNT OF PAYMENT O F THE SALARY AS WELL AS BONUS TO THE EXECUTIVE DIRECTOR OF THE ASSESSEE COMPANY IS NOT IN VIOLATION OF ANY PREVAILING PR OVISIONS OF THE INCOME TAX ACT 1961. 3- FURTHER, THE BONUS WAS DECLARED BY THE BOARD OF DIR ECTORS BY RESOLUTION PASSED IN A MEETING, AS PER POWER VESTED TO T HE 6 BOARD UNDER THE ARTICLES OF ASSOCIATION OF THE COMPANY. F URTHER THE SAID ACTION DONE WAS WITHIN THE PROVISIONS OF THE C OMPANIES AC 1956 AND THERE WAS NO VIOLATION OF ANY PREVALENT L AW OF LAND. 4- FURTHER IT IS SUBMITTED THAT LD AO AS WELL AS CIT (A ) ARE IGNORING THE MATTER OF FACT THAT, MR. ABHINAV KUMAR WAS APPOINTED AS EXECUTIVE DIRECTOR OF THE ASSESSEE COMPANY ON DATED 01-07-2008. HIS REMUNERATION WAS FIXED BY THE BO ARD RESOLUTION (PB. PG. 68). AFTER THE APPOINTMENT OF MR . ABHINAV KUMAR, DUE TO HIS TREMENDOUS EFFORTS AND BUSINESS GENERAT ING CAPABILITY THE TURNOVER OF THE COMPANY IN THE A Y IN QUESTION GREW BY MORE THAN 18 TIMES AS COMPARE TO LAST FY. FURTH ER THE TOTAL RECEIPTS OF THE ASSESSEE COMPANY ROSE FROM RS. 42.81 L ACS IN FY 2007-08 TO 831.73 LACS IN FY 2008-09. FURTHER T HE PERSONNEL EXPENSES REDUCED FROM 34.71 % OF THE TOTAL TU RNOVER IN FY 2007-08 TO 19.37% THE PROVISIONS OF SECTION. 5- FURTHER IT IS SUBMITTED THAT, TO APPRECIATE THE EFF ORTS OF MR. ABHINAV KUMAR AND FOR ABOVE MENTIONED REASONS THE BON US WAS DECIDED BY THE BOARD OF DIRECTORS OF THE ASSESSEE COMPANY (COPY OF BOARD RESOLUTION PB. PG.69), WITHIN THE PRO VISIONS OF THE COMPANIES ACT 1956 READ WITH INCOME TAX ACT 1961, WHICH WAS REASONABLE AND JUSTIFIED. FURTHER, SECTION 40 A (2)(A ) OF INCOME 7 TAX ACT 1961 CANNOT BE INVOKED AND HAVE NO APPLICATION UNLESS IT IS FIRST CONCLUDED THAT THE EXPENDITURE WAS EXCESSIVE O R UNREASONABLE. 6- FURTHER IT IS SUBMITTED THAT, LD AO IN THE ASSESSMENT ORDER AS WELL AS HON'BLE CIT(A) IN ENHANCEMENT NOTICE, ERRED IN DECIDING THE AMOUNT OF SALARY AND BONUS OF MR. ABHINAV KUMAR, AS THE REASONABLENESS OF THE REMUNERATION HAS TO BE CONSIDERED F ROM THE POINT OF VIEW OF A COMPANY AND IT WAS NOT OPEN T O THE ASSESSING OFFICERS AS WELL AS CIT(A) TO ADOPT A SUBJECTIVE STANDARD WITH REGARD TO THE PROPER REMUNERATION WHICH SHOULD BE PAID TO ITS DIRECTORS, RELIANCE IN THIS REGARD PLACED UPON THE FOLLOWING I. JUDGMENTS OF HON'BLE CALUCTTA HIGH COURT IN THE CASE OF SONAR AIROTECH PVT. LIMITED VERSUS COMMISSIONER OF INCOME -TAX [1993] 204 ITR 304 (CAL) THE HON'BLE COURT OBSERVED A S UNDER; 'IT IS BY NOW WELL-SETTLED THAT THE TRIBUNAL CANNOT AD OPT A SUBJECTIVE STANDARD OF REASONABLENESS OF THE INCREASE IN REMUNERATION AND DISALLOW A PART OF THE INCREASE IN TH E DIRECTORS' REMUNERATION ON THE GROUND THAT IT IS UNREASONABLY L ARGE. THE REASONABLENESS OF THE REMUNERATION HAS TO BE CONSIDERED FROM THE POINT OF VIEW OF A BUSINESSMAN AND IT WAS NOT OPEN TO THE 8 TRIBUNAL TO ADOPT A SUBJECTIVE STANDARD WITH REGARD TO THE PROPER REMUNERATION WHICH SHOULD BE PAID TO ITS DIRECTORS. IT HAS BEEN OBSERVED IN NEWTONE STUDIOS LTD. V. CIT [1 955] 28 ITR 378 (MAD), THAT THE INCOME-TAX OFFICER SHOULD NOT TAKE AN ARMCHAIR VIEW OF THE MANAGEMENT OF THE COMPANY AND DE CIDE IN HIS OPINION WHAT WAS THE REASONABLE REMUNERATION FOR A DIRECTOR AND DISALLOW SUCH PART OF THE REMUNERATION AS HE CONSIDER ED EXCESSIVE OR UNREASONABLE. WHAT APPLIES TO THE INCOME-TAX OFFICER EQUALLY APPLIES TO THE APPELLATE AUTHORITIES I NCLUDING THE APPELLATE TRIBUNAL. IT HAS BEEN HELD IN PATIALA BISCUI T MANUFACTURERS P. LTD. V. CIT [1976] 103 ITR 208 (P& H), THAT APPEALS ARE IN CONTINUATION OF THE ORIGINAL PROCEEDING S AND, THEREFORE, THE OPINION FORMED BY THE TRIBUNAL ON TH E MATTER COMING UP IN APPEAL BEFORE IT IS SUBJECT TO THE SAME REST RAINT AS FETTERS THE SUBJECTIVITY OF THE ASSESSING OFFICER'S JUDGMENT . ' II. IN THE CASE OF EXTRUSION PROCESS PVT. LIMITED VERSUS COMMISSIONER OF INCOME-TAX, BOMBAY [1979] 1191TR 287 (80M). 'THE REASONABLENESS OF THE REMUNERATION HAS TO BE CONSID ERED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND, IN OUR VIEW, IT WAS NOT OPEN TO THE TRIBUNAL TO ADOPT A SUBJECTIVE STAN DARD WITH 9 REGARD TO THE PROPER REMUNERATION WHICH SHOULD HAVE B EEN PAID TO THE MANAGING DIRECTOR. IN OUR VIEW, THE TRIBUNAL WAS CLEARLY IN ERROR IN HOLDING THAT ONLY A PART OF THE INCREASED RE MUNERATION FOR THE ASSESSMENT YEAR IN QUESTION SHOULD BE ALLOWED. ' III. IN THE CASE OF HIVE COMMUNICATION PVT. LTD. VERSU S COMMISSIONER OF INCOME TAX [2013] 353 ITR 200 (DEL). HO N'BLE DELHI HIGH COURT DECIDED THE QUESTION IN FAVOUR OF THE ASSESSEE AND IN THE NEGATIVE HOLDING THAT THE TRIBUNAL WAS NO T CORRECT IN LAW IN UPHOLDING DISALLOWANCE OF RS. 13.20 LACS OUT OF REMUNERATION PAID TO MR. SUSHIL PANDIT (DIRECT OR) BY INVOKING THE PROVISIONS OF SECTION 40A(2) OF THE ACT. IV. HON'BLE ALLAHABAD HIGH COURT IN ABBAS WAZIR (P) L TD. VS. CIT (2004) 265 ITR 77 (AII).WHEREIN THE HIGH COURT H ELD AS UNDER: 'IN NEWTONE STUDIOS LTD. V. CIT [1955J 28 ITR 378 (M AD), IT WAS OBSERVED THAT THE REMUNERATION PAID TO A DIRECTOR SHOU LD NOT BE REJECTED BY THE ASSESSING OFFICER ON ANY SUBJECTIVE STANDAR D OF REASONABLENESS, AND THAT SO LONG AS THE REALITY OF THE PAYMENT WAS NOT CHALLENGED AND NO ALLEGATION WAS MADE THAT THE PAYMENT WAS DICTATED BY OTHER THAN BUSINESS CONSIDERATIONS , THE 10 DEDUCTIBILITY OF THE EXPENDITURE SHOULD BE CONSIDERED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT FROM THE POIN T OF VIEW OF ANY OUTSIDER, INCLUDING THE ASSESSING OFFICER. A DISALL OWANCE CAN BE MADE ON THE GROUND THAT THE PAYMENT IS NOT FO R COMMERCIAL EXPEDIENCY, BUT NOT ON THE GROUND THAT IN T HE OPINION OF THE ASSESSING OFFICER IT IS UNREASONABLY HIGH. THE TEST IN EVERY CASE IS THAT OF ANY PRUDENT BUSINESSMEN. WE RESPECTFULLY AGREE WITH THE AFORESAID VIEW. IN OUR OP INION, WHENEVER A CLAIM IS MADE BY THE ASSESSEE BEFORE THE INCOM E- TAX OFFICER FOR ALLOWING AN EXPENDITURE AS A LEGITIMA TE BUSINESS EXPENDITURE, THE APPROACH OF THE INCOME-TAX OFFICER ( OR OTHER INCOME-TAX AUTHORITY) HAS TO BE THAT HE HAS TO LOOK A T THE MATTER FROM THE VIEW POINT OF A PRUDENT BUSINESSMAN, AND NOT FROM HIS OWN VIEW POINT, AND THEN ASCERTAIN WHETHER TH E SAID EXPENDITURE HAS BEEN INCURRED FOR THE PURPOSE OF COMMER CIAL EXPEDIENCY OR NOT. IN OTHER WORDS, THE INCOME-TAX OFF ICER MUST TRY TO PUT HIMSELF IN THE SHOES OF A PRUDENT BUSINESSMAN AND TRY TO LOOK AT THE MATTER FROM THAT POINT OF VIEW. EVEN WHILE INVOKING THE PROVISIONS OF SECTION 40A(2) OF THE ACT, THE REASONABLENESS OF THE EXPENDITURE FOR THE PURPOSE OF BU SINESS HAS TO BE JUDGED FROM THE POINT OF VIEW OF A BUSINESSM AN AND NOT THAT OF THE REVENUE. THE APPROACH HAS TO BE THAT OF A 11 PRUDENT BUSINESSMAN AND THE REASONABLENESS MUST BE LOOKE D INTO FROM BUSINESSMAN POINT OF VIEW. A BUSINESSMAN MAY MAKE AN EXPENDITURE, WHICH HE IS UNDER NO LEGAL OBLIGATION TO MAKE, BUT IF HE DOES SO AS A MEASURE OF COMMERCIAL EXPEDIENCY, IT MUST BE ALLOWED UND ER SECTION 37 OF THE INCOME-TAX ACT AS A LEGITIMATE BUSINESS EXPENDITURE. XXX XXXXX XXX XXXXX XXX XXXXX XXX XXXXX IN THE PRESENT CASE THE ASSESSEE HAS CONTENDED THAT IT HAS INCREASED THE SALARY OF THE DIRECTORS BECAUSE THE SALES HAD GONE UP AS MENTIONED IN PARAGRAPH 8 OF THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS). THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS CONSIDERED THE MATTER IN GREAT DETAIL AND HAS NOTICED THE INCREASE IN THE SALES IN THE RELEVANT ASSESSMENT YEAR AND HAS OBSERVED THAT SUCH GOOD PERFORMANCE WAS THE RESULT OF VERY GOOD AND SERIOUS WORK BY THE DI RECTORS, IN THE ORDER OF THE TRIBUNAL NO GOOD REASON HAS BEEN GIV EN WHY THE CLAIM OF THE ASSESSEE HAS BEEN PARTLY DISALLOWED. IN OUR O PINION, THERE WAS NO GOOD GROUND FOR MAKING SUCH DISALLOWANCE. I T SEEMS THAT THE TRIBUNAL LOST SIGHT OF THE CORRECT LEGAL PRINCIPLES (MENTIONED ABOVE) FOR DETERMINING WHETHER TO ALLOW THE 12 EXPENDITURE OR NOT. WE REITERATE THAT IT IS NOT FOR THE INCOME-TAX AUTHORITIES TO DETERMINE WHAT WOULD BE COMMERCIALLY EX PEDIENT, AND THAT IS THE FUNCTION OF THE COMPANY OR THE FIRM. THE INCOME- TAX AUTHORITIES CANNOT ORDINARILY INTERFERE IN SUCH MAT TERS. IT IS NOT FOR THE INCOME-TAX OFFICER TO DECIDE WHAT WO ULD BE THE CORRECT SALARY OF THE DIRECTORS OR OTHER OFFICERS OF THE CO MPANY, UNLESS ON THE FACE OF IT THE SALARY FIXED IS SO EXORBITAN T AND ABSURD, THAT IT CAN CLEARLY BE SAID TO BE FICTITIOUS AND AIMED AT TAX EVASION. V. IN CIT VS. EDWARD KEVENTER (PRIVATE) LTD. (1972) 86 ITR 370, THE CALCUTTA HIGH COURT CONSIDERING IDENTICAL PROV ISION IN 1922 ACT, IT WAS HELD THAT THE SECTION PLACES TWO LIMITA TIONS IN THE MATTER OF EXERCISE OF THE POWER. THE SECTION ENJOIN S THE ASSESSING OFFICER IN FORMING ANY OPINION AS TO THE REASONA BLENESS OR OTHERWISE OF THE EXPENDITURE INCURRED MUST TAKE INT O CONSIDERATION (I) THE LEGITIMATE BUSINESS NEEDS OF THE COM PANY AND (II) THE BENEFIT DERIVED BY OR ACCRUING TO THE COM PANY. THE LEGITIMATE BUSINESS NEEDS OF THE COMPANY MUST BE JUDGED FROM THE VIEW POINT OF THE COMPANY ITSELF AND MUST BE VIEWE D FROM THE POINT OF VIEW OF A PRUDENT BUSINESSMAN. IT IS NOT F OR THE ASSESSING OFFICER TO DICTATE WHAT THE BUSINESS NEEDS OF THE 13 COMPANY SHOULD BE AND HE IS ONLY TO JUDGE THE LEGITIM ACY OF THE BUSINESS NEEDS OF THE COMPANY FROM THE POINT OF VIEW OF A PRUDENT BUSINESSMAN. THE BENEFIT DERIVED OR ACCRUING TO THE COMPANY MUST ALSO BE CONSIDERED FROM THE ANGLE OF A PRUD ENT BUSINESSMAN. THE TERM 'BENEFIT' TO A COMPANY IN RELATI ON TO ITS BUSINESS, IT MUST BE REMEMBERED, HAS A VERY WIDE CONNOT ATION AND MAY NOT NECESSARILY BE CAPABLE OF BEING ACCURATELY MEASURED IN TERMS OF POUND, SHILLINGS AND PENCE IN AL L CASES. BOTH THESE ASPECTS HAVE TO BE CONSIDERED JUDICIOUSLY, DISPASSIONATELY WITHOUT ANY BIAS OF ANY KIND FROM THE VIEW-POINT OF REASONABLE AND HONEST PERSON IN BUSINESS. ' THE AFORESAID JUDGMENT OF CALCUTTA HIGH COURT WAS AFFI RMED BY THE APEX COURT IN CIL VS. EDWARD KEVENTER (PRIVATE) LTD. (1978) 1151TR 149 (SC). VI. SIMILAR VIEW IS HELD BY THE MADRAS HIGHCOURT IN CL'F VS. COMPUTER GRAPHICS LTD. (2006) 285 ITR 84. IN THE SAME LINE IS THE JUDGMENT OF BOMBAY HIGH COURT IN THE CASE OF CIT V S. SHATRUNJAY DIAMONDS (2003) 261 ITR 258 (BOM). 7- FURTHER IT IS SUBMITTED THAT, THE SCOPE OF SECTION 4 0A (2) AS EXPLAINED BY CBDT IN CIRCULAR NO. 6P, DATED 6THJULY, 1968. THE CBOT CLARIFIED THAT WHILE EXAMINING THE REASONABLENE SS OF 14 EXPENDITURE THE ASSESSING OFFICER IS EXPECTED TO EXERCISE H IS JUDGMENT IN A REASONABLE AND FAIR MANNER. IT SHOULD BE BORNE IN MIND THAT THE PROVISION IS MEANT TO CHECK EVASION OF TAX THROUGH EXCESSIVE OR UNREASONABLE PAYMENTS TO RELATIVES AND ASSOCIA TE CONCERNS AND SHOULD NOT BE APPLIED IN A MANNER WHICH WIL L CAUSE HARDSHIP IN BONA FIDE CASES. 8- FURTHER IT IS THE MATTER OF FACTS THE IN PRESENT CASE ASSESSEE COMPANY AND MR. ASHWANI KUMAR FALLS WITHIN SAME RATE OF TAX IE. 30%. FURTHER THE DEDUCTION CLAIMED BY THE ASSESSEE COMPAN Y ON THE EXPENDITURE IN THE HEAD OF REMUNERATION OF E XECUTIVE DIRECTOR MR. ABHINAV KUMAR IS DULY DISCLOSED BY HIM IN HIS RETURN FOR THE AY 2009-10, (ITR OF MR. ABHINAV KUMAR PB. P G.88) THEREFORE IT CANNOT BE SAID AS COLORABLE DEVICE FOR TAX EVASION. HENCE THE DISALLOWANCE IS BAD IN LAW. RELIANCE IS THIS REGA RD PLACED UPON THE FOLLOWING JUDGMENTS; I. IN THE CASE OF MIS HOLTEC CONSULTING PVT. LTD., VERSUS DCIT [ITA NOS. 3878/DEL/2010 & 796/DELL2011 DATED 25-01-2 012] THIS HON'BLE TRIBUNAL HELD AS UNDER; '17.4 ..W E ALSO FIND THAT ASSESSEE HAS PAID TAXES AT MAXIMUM MARGINAL RATE. BOTH THE DIRECTORS HAVE ADMITT ED THE PAYMENT OF COMMISSION RECEIVED AND OFFERED THE SAME IN T HEIR 15 INCOME TAX RETURNS AND HAD PAID AT A MAXIMUM MARGINA L RATE. THIS CLEARLY ESTABLISHES THE FACT THAT THERE HAS BEEN NO TAX AVOIDANCE MOTIVE BEHIND THE PAYMENT OF COMMISSION TO T HE DIRECTORS BY THE ASSESSEE COMPANY. WE FURTHER FIND THAT TH E CASE LAW REFERRED BY THE ID. COUNSEL OF THE ASSES!I.EE ARE A LSO GERMANE AND SUPPORT THE CASE OF THE ASSESSEE. 17.5 IN THE BACKGROUND OF THE AFORESAID DISCUSSIONS AND PRECEDENTS, IN OUR CONSIDERED OPINION, THE PAYMENT OF COMMISSION WAS JUSTIFIED AND NOT DISALLOWABLE U/S 36(1 )( II) OF THE IT ACT. ' II. THIS HON'BLE TRIBUNAL IN THE CASE OF DY CIT VS AGAR WAL METAL WORKS LTD [I.T.A .NO.-593/DEI/2012 DATED 11-10 -2013 ITAT DELHI] HELD AS UNDER; 'THE LD. CIT (A) HAS RECORDED A CATEGORICAL FINDING THA T THESE DIRECTORS HAD PAID TAX ON THE AFORESAID BONUS ALONG WIT H SALARY ON THE MAXIMUM MARGINAL RATE AND AS SUCH THERE WAS NO L OSS TO THE REVENUE. THE ID. DR COULD NOT REFUTE THIS FINDING GIVEN BY THE LD. FIRST APPELLATE AUTHORITY. AS SUCH, WE ARE OF T HE CONSIDERED OPINION THAT THE AMOUNT OF BONUS PAID TO TH E DIRECTORS IS FULLY DEDUCTIBLE U/S 36(1 )(II) OF THE ACT A ND THE 16 IMPUGNED ORDER DOES NOT MERIT ANY INTERFERENCE ON THI S COUNT. THIS GROUND IS NOT ALLOWED. III. HON'BLE MUMBAI TRIBUNAL IN THE CASE OF GARGI HUTT ENES ALBERTUS (P) LTD. VERSUS ADDL. CIT [ITA NO. 1822/MUM/2 009 DATED 18-01-2010] HELD AS UNDER; 'IN CIRCULAR NO.6-P OF 1968 DATED 6TH JULY, 1968, THE CBOT HAS EXPLAINED IN PARAGRAPH 74 THAT WHILE INVOKING THE P ROVISIONS OF THE SECTION THE ASSESSING OFFICER IS EXPECTED TO EXERCISE HIS JUDGMENT IN A REASONABLE AND FAIR MANNER AND THAT IT SHOULD BE BORNE IN MIND THAT THE SECTION IS MEANT TO CHECK EVASION OF TAX THROUGH EXCESSIVE OR UNREASONABLE PAYMENTS TO RELATIVES A ND ASSOCIATE CONCERNS AND SHOULD NOT BE APPLIED IN THE MANNER WHICH WILL CAUSE HARDSHIP IN BONAFIDE CASES. THE DETAILS FI LED BY THE ASSESSEE ALSO SHOW THAT GARGI INDUSTRIES IS A COMPANY W ITH A TURNOVER OF RS. 21.68 CRORES AND A TAXABLE INCOME OF RS. 1, 16,67,9901- FOR THE ASSESSMENT YEAR 2005-06 AND IS ALSO ASSESSED TO TAX. THE ASSESSEE ITSELF HAS DECLARED A TOTAL INCOM E OF RS.8,31,43,0951-. IT CANNOT THEREFORE BE SUGGESTED THAT THE ASSESSEE WAS INDULGING IN UNFAIR MEANS TO SHIFT ITS PROFITS TO ANOTHER ENTITY. BOTH THE ASSESSEE AND GARGI INDUSTRIES A RE IN THE MAXIMUM TAX BRACKET AND THERE CAN BE NO TAX ADVANTAG E. IN 17 THESE CIRCUMSTANCES, WE SEE NO MERIT IN THE DISALLOWANCE W HICH IS HEREBY DELETED. GROUND NO. 1 IS THUS ALLOWED. IV. IN THE CASE OF CIT VS. INDO SAUDI SERVICES (TRAVEL ) P. LTD. 310 ITR 306 (BOM) WHERE THE ASSESSEE WAS A GENERAL SALES AGENT OF A FOREIGN AIRLINE S. FOR THE A. YS. 1991-92 AND 1992-93 THE ASSESSING OFFICER FOUND THAT THE INCENTIVE COMMISSION P AID BY THE ASSESSEE TO THE SISTER CONCERN WAS HALF PERCENT MORE T HAN THAT PAID TO OTHER SUB-AGENTS. RELYING ON THE PROVISIO NS OF SECTION 40A(2) OF THE INCOME-TAX ACT, 1961, THE ASSESSING OFFICER DISALLOWED THE EXCESS COMMISSION PAID TO THE SISTER CONCERN AT THE RATE OF HALF PERCENT. THE TRIBUNAL DELE TED THE ADDITIONS. ON APPEAL BY THE REVENUE, THE BOMBAY HIGH COURT UPHE LD THE DECISION OF THE TRIBUNAL AND HELD AS UNDER: 'I) UNDER THE CBOT CIRCULAR NO. 6-P, DATED 061071196 8, IT IS STATED THAT NO DISALLOWANCE IS TO BE MADE ULS. 40A(2) IN RESPECT OF THE PAYMENTS MADE TO THE RELATIVES AND SISTER CONCERNS WHERE THERE IS NO ATTEMPT TO EVADE TAX. II) THE LEARNED ADVOCATE APPEARING FOR THE APPELLANT WAS NOT IN A POSITION TO POINT OUT HOW THE ASSESSEE EVADED PAYMENT OF TAX BY 18 THE ALLEGED PAYMENT OF HIGHER COMMISSION TO ITS SISTER CONCERN SINCE THE SISTER CONCERN WAS ALSO PAYING TAX AT HIGHER RATE AND COPIES OF THE ASSESSMENT ORDERS OF THE SISTER CONCERN WERE TA KEN ON RECORD BY THE TRIBUNAL. III) IN VIEW OF THE AFORESAID ADMITTED FACTS WE ARE OF THE VIEW THAT THE TRIBUNAL WAS CORRECT IN COMING TO THE CONCLUSION THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) WAS WRONG IN DISALLOWING HALF PERCENT COMMISSION TO THE SISTER CONCERN' V. RECENTLY HON'BLE GUJARAT HIGH COURT IN THE CASE PRO CIT VS GUJARAT GAS FINANCIAL SERVICES LTD. [ITA NO. 428 & 43 1 OF 2015 DATED 07-07-2015] HELD AS UNDER; '13. AS HAS BEEN FOUND BY US IN THE PRECEDING PARA OF T HIS JUDGMENT THAT THE RESPONDENT COMPANY AS WELL AS THE PA RENT COMPANY, BOTH ARE ASSESSED TO INCOME TAX AT THE MAXIMUM MARGINAL RATE AND, THEREFORE IT CANNOT BE SAID THAT T HE SERVICE CHARGE IS PAID TO THE RESPONDENT COMPANY AT A UNREASONA BLE RATE TO EVADE INCOME TAX. EVEN THE LEARNED COUNSEL MR . BHATT FOR THE REVENUE DOES NOT DISPUTE THIS FACT. 14. WE ARE IN AGREEMENT WITH THE OBSERVATIONS MADE BY THE TRIBUNAL AS WELL AS THE RATIO LAID DOWN BY THE COORDIN ATE BENCH 19 OF THIS COURT IN THE CASE OF (1) COMMISSIONER OF INCOME TAX-I VS ENVIRO CONTROL ASSOCIATED (P) LTD., AS REPORTED AT (201 4) 43 TAXMANN.COM 291 (GUJARAT); (2) COMMISSIONER OF INCOME T AX- III VS ASHOK J PATEL, AS REPORTED AT (2014) 43 TAXMANN . COM 227 (GUJARAT) AND (3) COMMISSIONER OF INCOME TAX VS IND O SAUDI SERVICES (TRAVEL) P. LTD. AS REPORTED AS (2009) 3 10 ITR 306 (BOM). 15 IT IS PERTINENT TO NOTE THAT SO FAR AS THE CIRCULAR DATED 6.7. 1968 IS CONCERNED, IT MAKES CLEAR THAT THE PROVISIONS UNDE R SECTION 40A (2) AND PARTICULARLY WITH REGARD TO THE T RANSACTION BETWEEN THE RELATIVES AND ASSOCIATES IS CONCERNED, THE SAME SHALL BE TREATED AS BONA FIDE CASE UNLESS THE OFFICER FIND S IT THAT ONE OF THEM IS TRYING TO EVADE PAYMENT OF TAX. 16 CONSIDERING THE OVERALL FACTS OF THE CASE AND THE RAT IO LAID DOWN BY THE HON'BLE APEX COURT, WE ARE OF THE OPINIO N THAT THE APPEALS ARE MERITLESS AND THE SAME DESERVE TO BE DISMISSE D AND ACCORDINGLY DISMISSED.' 9- FURTHER THIS IS SUBMITTED THAT, THE CONTENTION OF L D AO THAT, ASSESSEE COMPANY GIVEN THE BONUS TO A SINGLE DIRECTOR, CANNO T BE A GROUND FOR DISALLOWING THE CLAIM. RELIANCE IN T HIS REGARD IS PLACED UPON IN THE CASE OF COMMISSIONER OF INCOME-TAX, 20 BOMBAY VERSUS WALCHAND AND COMPANY PVT. LIMITED [1967] 65 ITR 381 (SC) THEREIN HON'BLE SUPREME COURT ACCORDED TH E VIEW TAKEN BY HON'BLE HIGH COURT OF BOMBAY; 'THE HIGH COURT ON A CAREFUL CONSIDERATION HAS POINTED O UT THAT THE WORK OF THE ASSESSEE HAS INCREASED CONSIDERABLY AND HA S BECOME MORE STRENUOUS BY REASON OF THE PROSPERITY OF TH E MANAGED COMPANIES AND IT WOULD BE REASONABLE AND NATUR AL TO INFER THAT 'THE STRAIN ON BOTH THE DIRECTORS AND THE T OP EXECUTIVES HAD INCREASED JUSTIFYING INCREASE IN THEIR REMUNERATION '. IN THEIR VIEW THE FACT THAT ADDITION AL REMUNERATION WAS NOT SANCTIONED IN FAVOUR OF OTHER EXE CUTIVE OFFICERS IS BY ITSELF NOT A GROUND FOR REGARDING THE EX PENDITURE INCURRED AS OTHERWISE THAN WHOLLY AND EXCLUSIVELY LAID O UT OR EXPENDED FOR THE PURPOSE OF THE BUSINESS. WE AGREE WITH THE HIGH COURT THAT THE ORDER OF THE TRIBUNAL DISALLOWING THE CLAIM FOR ALLOWANCE OF THE WHOLE OF THE ADDITIONAL REMUNER ATION WAS NOT SUPPORTED BY ANY EVIDENCE. THE APPEALS THEREFORE FAIL AND ARE DISMISSED WITH COSTS.' 7. ON THE OTHER HAND LD. DR RELIED UPON THE ORDER O F THE LD. CIT(A) AND STATED THAT THE AO DISALLOWED RS. 27,50,000/- IN THE A SSESSMENT ORDER. BUT THIS FIGURE WAS DETERMINED WITHOUT ANY BASIS, HENCE, T HE TOTAL DISALLOWANCE 21 WAS RIGHTLY DETERMINED BY THE LD. CIT(A) AT RS. 88,75 ,000/- (I.E. RS. 95,00,000 RS. 6,25,000) AND ACCORDINGLY ENHANCEMENT NOTICE WAS ISSUED TO THE ASSESSEE AND AFTER CONSIDERING THE REPLY FROM THE ASSESSEE, THE DISALLOWANCE OF RS. 27,50,000/- WAS CONFIRMED AND THE IN COME WAS FURTHER ENHANCED BY RS. 61,25,000/-, WHICH DOES NOT NEED ANY IN TERFERENCE ON OUR PART. IN VIEW OF THE ABOVE, HE REQUESTED THAT THE LD. CIT(A)S ORDER MAY BE UPHELD AND APPEAL OF THE ASSESSEE MAY BE DISMISSED ACCORDIN GLY. 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE REL EVANT RECORDS AVAILABLE WITH US, ESPECIALLY THE ORDERS PASSED BY THE R EVENUE AUTHORITIES ALONGWITH THE WRITTEN SYNOPSIS FILED BY THE ASSESSEES CO UNSEL AS WELL AS THE CASE LAWS CITED BY HIM THEREIN, AS AFORESAID. 9. THE ISSUE INVOLVED IN THE PRESENT APPEAL IS RELATING TO ENHANCING THE INCOME BY RS. 61,25,000/- OF THE ASSESSEE BY MAKING DISAL LOWANCE OF AN AMOUNT OF RS. 88,75,000/- ON ACCOUNT OF SALARY AND BO NUS PAID TO THE DIRECTOR. WE FIND THAT THIS EXPENDITURE WAS CLAIMED BY THE ASSESSEE COMPANY ON ACCOUNT OF PAYMENT OF THE SALARY AS WELL AS BONUS TO THE EXECUTIVE DIRECTOR OF THE ASSESSEE COMPANY IS NOT IN VIO LATION OF ANY PREVAILING PROVISIONS OF THE INCOME TAX ACT, 1961. WE FURTHER NOTE THAT THE BONUS WAS DECLARED BY THE BOARD OF DIRECTORS BY RESOLUTI ON PASSED IN A MEETING, AS PER POWER VESTED TO THE BOARD UNDER THE A RTICLES OF ASSOCIATION OF THE COMPANY. FURTHER THE SAID ACTION DONE WAS WITHI N THE PROVISIONS OF 22 THE COMPANIES AC 1956 AND THERE WAS NO VIOLATION OF AN Y PREVALENT LAW OF LAND. IT WAS ALSO OBSERVED THAT THE LOWER AUTHORITIE S IGNORED THE MATTER THAT, MR. ABHINAV KUMAR WAS APPOINTED AS EXECUTIVE DI RECTOR OF THE ASSESSEE COMPANY ON DATED 01-07-2008. HIS REMUNERATION W AS FIXED BY THE BOARD AS UNDER:- - SALARY : RS. 5,00,000/- PER MONTH. - PERQUISITES : IN ADDITION TO THE SALARY, HE SHALL ALSO BE ENTITLED TO PERQUISITES SUCH AS RENT FREE ACCOMMODATION, PROVISION OF CAR AND TELEPHONE AT RESIDENCE, ETC. - INCENTIVE AND BONUS : ON THE BASIS OF PERFORMANCE, FR OM TIME TO TIME, TO BE DETERMINED BY THE BOARD. - LEAVE TRAVEL ALLOWANCE: THE DIRECTOR AND HIS DEPEND ENT FAMILY MEMBERS SHALL BE ENTITLED TO LEAVE TRAVEL ALLO WANCE ONCE IN A YEAR. - MEDICAL EXPENSES: REIMBURSEMENT OF MEDICAL EXPENSE S OF THE DIRECTOR AND HIS DEPENDENT FAMILY MEMBERS. 10. WE FIND FORCE IN THE CONTENTION OF THE LD. COUNSE L OF THE ASSESSEE THAT AFTER THE APPOINTMENT OF MR. ABHINAV KUMAR, DUE TO HIS TREMENDOUS EFFORTS AND BUSINESS GENERATING CAPABILITY THE TURNOVER OF THE COMPANY IN THE A Y IN 23 QUESTION GREW BY MORE THAN 18 TIMES AS COMPARE TO LAST F Y. FURTHER THE TOTAL RECEIPTS OF THE ASSESSEE COMPANY ROSE FROM RS. 42.81 LACS IN FY 2007- 08 TO 831.73 LACS IN FY 2008-09. FURTHER THE PERSONNEL EXPENSES REDUCED FROM 34.71 % OF THE TOTAL TURNOVER IN FY 2007-08 TO 19.37% THE PROVISIONS OF SECTION. THEREFORE, TO APPRECIATE THE EFFORTS OF MR . ABHINAV KUMAR, DIRECTOR OF THE COMPANY AND FOR ABOVE MENTIONED REAS ONS THE BONUS WAS DECIDED BY THE BOARD OF DIRECTORS OF THE ASSESSEE COMPANY VIDE RESOLUTION DATED 16.3.2009 AT RS. 50,00,000/- LACS, WHICH WITHIN THE PROVISIONS OF THE COMPANIES ACT 1956 READ WITH INCOME TAX ACT 1961, WHICH WAS REASONABLE AND JUSTIFIED. WE FIND CONSIDERABLE COGENCY IN SUBMISSION OF THE LD. COUNSEL OF THE ASSESSEE THAT SECTION 40A(2)(A) OF INCOME TAX AC T 1961 CANNOT BE INVOKED AND HAVE NO APPLICATION UNLESS IT IS FIRST CONCL UDED THAT THE EXPENDITURE WAS EXCESSIVE OR UNREASONABLE. 11. WE FURTHER NOTE THAT THE AO IN THE ASSESSMENT ORDER AS WELL AS LD. CIT(A) IN ENHANCEMENT NOTICE, ERRED IN DECIDING THE AM OUNT OF SALARY AND BONUS OF MR. ABHINAV KUMAR, AS THE REASONABLENESS OF TH E REMUNERATION HAS TO BE CONSIDERED FROM THE POINT OF VIEW OF A COMPANY AND IT WAS NOT OPEN TO THE ASSESSING OFFICERS AS WELL AS LD. CIT(A) TO ADOPT A SU BJECTIVE STANDARD WITH REGARD TO THE PROPER REMUNERATION WHICH SHOULD B E PAID TO ITS DIRECTORS. THIS VIEW IS FORTIFIED BY THE FOLLOWING DECISIONS: 24 I. JUDGMENTS OF HON'BLE CALUCTTA HIGH COURT IN THE CASE OF SONAR AIROTECH PVT. LIMITED VERSUS COMMISSIONER OF INCOME-TAX [1993] 204 ITR 304 (CAL) THE HON'BLE COU RT OBSERVED AS UNDER; 'IT IS BY NOW WELL-SETTLED THAT THE TRIBUNAL CANNOT AD OPT A SUBJECTIVE STANDARD OF REASONABLENESS OF THE INCREASE IN REMUNERATION AND DISALLOW A PART OF THE INCREASE IN TH E DIRECTORS' REMUNERATION ON THE GROUND THAT IT IS UNREASONABLY L ARGE. THE REASONABLENESS OF THE REMUNERATION HAS TO BE CONSIDERED FROM THE POINT OF VIEW OF A BUSINESSMAN AND IT WAS NOT OPEN TO THE TRIBUNAL TO ADOPT A SUBJECTIVE STANDARD WITH REGARD TO THE PROPER REMUNERATION WHICH SHOULD BE PAID TO ITS DIRECTORS. IT HAS BEEN OBSERVED IN NEWTONE STUDIOS LTD. V. CIT [1 955] 28 ITR 378 (MAD), THAT THE INCOME-TAX OFFICER SHOULD NOT TAKE AN ARMCHAIR VIEW OF THE MANAGEMENT OF THE COMPANY AND DE CIDE IN HIS OPINION WHAT WAS THE REASONABLE REMUNERATION FOR A DIRECTOR AND DISALLOW SUCH PART OF THE REMUNERATION AS HE CONSIDER ED EXCESSIVE OR UNREASONABLE. WHAT APPLIES TO THE INCOME-TAX OFFICER EQUALLY APPLIES TO THE APPELLATE AUTHORITIES I NCLUDING THE APPELLATE TRIBUNAL. IT HAS BEEN HELD IN PATIALA BISCUI T MANUFACTURERS P. LTD. V. CIT [1976] 103 ITR 208 (P& H), THAT 25 APPEALS ARE IN CONTINUATION OF THE ORIGINAL PROCEEDING S AND, THEREFORE, THE OPINION FORMED BY THE TRIBUNAL ON TH E MATTER COMING UP IN APPEAL BEFORE IT IS SUBJECT TO THE SAME REST RAINT AS FETTERS THE SUBJECTIVITY OF THE ASSESSING OFFICER'S JUDGMENT . ' II. IN THE CASE OF EXTRUSION PROCESS PVT. LIMITED VERSUS COMMISSIONER OF INCOME-TAX, BOMBAY [1979] 119 1TR 287 (BOM ). 'THE REASONABLENESS OF THE REMUNERATION HAS TO BE CONSID ERED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND, IN OUR VIEW, IT WAS NOT OPEN TO THE TRIBUNAL TO ADOPT A SUBJECTIVE STAN DARD WITH REGARD TO THE PROPER REMUNERATION WHICH SHOULD HAVE B EEN PAID TO THE MANAGING DIRECTOR. IN OUR VIEW, THE TRIBUNAL WAS CLEARLY IN ERROR IN HOLDING THAT ONLY A PART OF THE INCREASED RE MUNERATION FOR THE ASSESSMENT YEAR IN QUESTION SHOULD BE ALLOWED. ' III. IN THE CASE OF HIVE COMMUNICATION PVT. LTD. V ERSUS COMMISSIONER OF INCOME TAX [2013] 353 ITR 200 (DEL) . HON'BLE DELHI HIGH COURT DECIDED THE QUESTION IN FAVOUR OF THE ASSESSEE AND IN THE NEGATIVE HOLDING THAT THE TRIBUNAL WAS NOT CORRECT IN LAW IN UPHOLDING DISALLOWANCE OF RS. 13.20 L ACS OUT OF REMUNERATION PAID TO MR. SUSHIL PANDIT (DIRECTOR) BY INVOKING THE PROVISIONS OF SECTION 40A(2) OF THE ACT. 26 IV. HON'BLE ALLAHABAD HIGH COURT IN ABBAS WAZIR (P ) LTD. VS. CIT (2004) 265 ITR 77 (ALL) .WHEREIN THE HIGH COURT HELD AS UNDER: 'IN NEWTONE STUDIOS LTD. V. CIT [1955J 28 ITR 378 (M AD), IT WAS OBSERVED THAT THE REMUNERATION PAID TO A DIRECTOR SHOU LD NOT BE REJECTED BY THE ASSESSING OFFICER ON ANY SUBJECTIVE STANDAR D OF REASONABLENESS, AND THAT SO LONG AS THE REALITY OF THE PAYMENT WAS NOT CHALLENGED AND NO ALLEGATION WAS MADE THAT THE PAYMENT WAS DICTATED BY OTHER THAN BUSINESS CONSIDERATIONS , THE DEDUCTIBILITY OF THE EXPENDITURE SHOULD BE CONSIDERED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT FROM THE POIN T OF VIEW OF ANY OUTSIDER, INCLUDING THE ASSESSING OFFICER. A DISALL OWANCE CAN BE MADE ON THE GROUND THAT THE PAYMENT IS NOT FO R COMMERCIAL EXPEDIENCY, BUT NOT ON THE GROUND THAT IN T HE OPINION OF THE ASSESSING OFFICER IT IS UNREASONABLY HIGH. THE TEST IN EVERY CASE IS THAT OF ANY PRUDENT BUSINESSMEN. WE RESPECTFULLY AGREE WITH THE AFORESAID VIEW. IN OUR OP INION, WHENEVER A CLAIM IS MADE BY THE ASSESSEE BEFORE THE INCOM E- TAX OFFICER FOR ALLOWING AN EXPENDITURE AS A LEGITIMA TE BUSINESS EXPENDITURE, THE APPROACH OF THE INCOME-TAX OFFICER ( OR OTHER INCOME-TAX AUTHORITY) HAS TO BE THAT HE HAS TO LOOK A T THE MATTER FROM THE VIEW POINT OF A PRUDENT BUSINESSMAN, A ND NOT 27 FROM HIS OWN VIEW POINT, AND THEN ASCERTAIN WHETHER TH E SAID EXPENDITURE HAS BEEN INCURRED FOR THE PURPOSE OF COMMER CIAL EXPEDIENCY OR NOT. IN OTHER WORDS, THE INCOME-TAX OFF ICER MUST TRY TO PUT HIMSELF IN THE SHOES OF A PRUDENT BUSINESSMAN AND TRY TO LOOK AT THE MATTER FROM THAT POINT OF VIEW. EVEN WHILE INVOKING THE PROVISIONS OF SECTION 40A(2) OF THE ACT, THE REASONABLENESS OF THE EXPENDITURE FOR THE PURPOSE OF BU SINESS HAS TO BE JUDGED FROM THE POINT OF VIEW OF A BUSINESSM AN AND NOT THAT OF THE REVENUE. THE APPROACH HAS TO BE THAT OF A PRUDENT BUSINESSMAN AND THE REASONABLENESS MUST BE LOOKE D INTO FROM BUSINESSMAN POINT OF VIEW. A BUSINESSMAN MAY MAKE AN EXPENDITURE, WHICH HE IS UNDER NO LEGAL OBLIGATION TO MAKE, BUT IF HE DOES SO AS A MEASURE OF COMMERCIAL EXPEDIENCY, IT MUST BE ALLOWED UND ER SECTION 37 OF THE INCOME-TAX ACT AS A LEGITIMATE BUSINESS EXPENDITURE. XXX XXXXX XXX XXXXX XXX XXXXX XXX XXXXX IN THE PRESENT CASE THE ASSESSEE HAS CONTENDED THAT IT HAS INCREASED THE SALARY OF THE DIRECTORS BECAUSE THE SALES HAD GONE UP AS MENTIONED IN PARAGRAPH 8 OF THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS). THE COMMISSIONER OF 28 INCOME-TAX (APPEALS) HAS CONSIDERED THE MATTER IN GREAT DETAIL AND HAS NOTICED THE INCREASE IN THE SALES IN THE RELEVANT ASSESSMENT YEAR AND HAS OBSERVED THAT SUCH GOOD PERFORMANCE WAS THE RESULT OF VERY GOOD AND SERIOUS WORK BY THE DI RECTORS, IN THE ORDER OF THE TRIBUNAL NO GOOD REASON HAS BEEN GIV EN WHY THE CLAIM OF THE ASSESSEE HAS BEEN PARTLY DISALLOWED. IN OUR O PINION, THERE WAS NO GOOD GROUND FOR MAKING SUCH DISALLOWANCE. I T SEEMS THAT THE TRIBUNAL LOST SIGHT OF THE CORRECT LEGAL PRINCIPLES (MENTIONED ABOVE) FOR DETERMINING WHETHER TO ALLOW THE EXPENDITURE OR NOT. WE REITERATE THAT IT IS NOT FOR THE INCOME-TAX AUTHORITIES TO DETERMINE WHAT WOULD BE COMMERCIALLY EX PEDIENT, AND THAT IS THE FUNCTION OF THE COMPANY OR THE FIRM. THE INCOME- TAX AUTHORITIES CANNOT ORDINARILY INTERFERE IN SUCH MAT TERS. IT IS NOT FOR THE INCOME-TAX OFFICER TO DECIDE WHAT WO ULD BE THE CORRECT SALARY OF THE DIRECTORS OR OTHER OFFICERS OF THE CO MPANY, UNLESS ON THE FACE OF IT THE SALARY FIXED IS SO EXORBITAN T AND ABSURD, THAT IT CAN CLEARLY BE SAID TO BE FICTITIOUS AND AIMED AT TAX EVASION. V. IN CIT VS. EDWARD KEVENTER (PRIVATE) LTD. (1972) 86 ITR 370, THE CALCUTTA HIGH COURT CONSIDERING IDENTICAL PROVISION IN 1922 ACT, IT WAS HELD THAT THE SECTION PL ACES TWO 29 LIMITATIONS IN THE MATTER OF EXERCISE OF THE POWER. TH E SECTION ENJOINS THE ASSESSING OFFICER IN FORMING ANY OPINION AS TO THE REASONABLENESS OR OTHERWISE OF THE EXPENDITURE INCURRED MUST TAKE INTO CONSIDERATION (I) THE LEGITIMATE BUSINESS NEE DS OF THE COMPANY AND (II) THE BENEFIT DERIVED BY OR ACCRUING TO THE COMPANY. THE LEGITIMATE BUSINESS NEEDS OF THE COMPANY MU ST BE JUDGED FROM THE VIEW POINT OF THE COMPANY ITSELF A ND MUST BE VIEWED FROM THE POINT OF VIEW OF A PRUDENT BUSINESSMAN . IT IS NOT FOR THE ASSESSING OFFICER TO DICTATE WHAT THE BUSINESS N EEDS OF THE COMPANY SHOULD BE AND HE IS ONLY TO JUDGE THE LEGITIMACY OF THE BUSINESS NEEDS OF THE COMPANY FROM THE POINT OF V IEW OF A PRUDENT BUSINESSMAN. THE BENEFIT DERIVED OR ACCRUING TO THE COMPANY MUST ALSO BE CONSIDERED FROM THE ANGLE OF A PRUD ENT BUSINESSMAN. THE TERM 'BENEFIT' TO A COMPANY IN RELATI ON TO ITS BUSINESS, IT MUST BE REMEMBERED, HAS A VERY WIDE CONNOT ATION AND MAY NOT NECESSARILY BE CAPABLE OF BEING ACCURATELY MEASURED IN TERMS OF POUND, SHILLINGS AND PENCE IN AL L CASES. BOTH THESE ASPECTS HAVE TO BE CONSIDERED JUDICIOUSLY, DISPASSIONATELY WITHOUT ANY BIAS OF ANY KIND FROM THE VIEW-POINT OF REASONABLE AND HONEST PERSON IN BUSINESS. ' 30 THE AFORESAID JUDGMENT OF CALCUTTA HIGH COURT WAS AFFI RMED BY THE APEX COURT IN CIL VS. EDWARD KEVENTER (PRIVATE) LTD. (1978) 1151TR 149 (SC). VI. SIMILAR VIEW IS HELD BY THE MADRAS HIGHCOURT I N CL'F VS. COMPUTER GRAPHICS LTD. (2006) 285 ITR 84. IN THE SAME LINE IS THE JUDGMENT OF BOMBAY HIGH COURT IN THE CASE O F CIT VS. SHATRUNJAY DIAMONDS (2003) 261 ITR 258 (BOM). 12. WE NOTE THAT THE SCOPE OF SECTION 40A (2) AS EXPL AINED BY CBDT IN CIRCULAR NO. 6P, DATED 6THJULY, 1968. THE CBDT CLARIF IED THAT WHILE EXAMINING THE REASONABLENESS OF EXPENDITURE THE ASSESSIN G OFFICER IS EXPECTED TO EXERCISE HIS JUDGMENT IN A REASONABLE AND FAIR MANNER. IT SHOULD BE BORNE IN MIND THAT THE PROVISION IS MEANT TO CHECK EVASION OF TAX THROUGH EXCESSIVE OR UNREASONABLE PAYMENTS TO RELATIVES AND ASSOCI ATE CONCERNS AND SHOULD NOT BE APPLIED IN A MANNER WHICH WILL CAUSE HA RDSHIP IN BONA FIDE CASES. 13. ON PERUSING THE ITR OF SH. ABHINAV KUMAR AT PAGE NO. 88 OF THE PAPER BOOK, IT IS ESTABLISHED THAT IN THE PRESENT CASE ASSESSE E COMPANY AND MR. ABHINAV KUMAR FALLS WITHIN SAME RATE OF TAX I.E. 30 %. FURTHER THE DEDUCTION CLAIMED BY THE ASSESSEE COMPANY ON THE EXPENDITURE IN TH E HEAD OF REMUNERATION OF EXECUTIVE DIRECTOR MR. ABHINAV KUMAR IS DULY DISCLOSED BY HIM IN HIS RETURN FOR THE AY 2009-10, THEREFORE IT C ANNOT BE SAID AS COLORABLE 31 DEVICE FOR TAX EVASION. HENCE THE DISALLOWANCE IN D ISPUTE IS BAD IN LAW AND DESERVE TO BE DELETED. THIS VIEW IS ALSO FORTIFIED B Y THE FOLLOWING JUDGMENTS:- I. IN THE CASE OF M/S HOLTEC CONSULTING PVT. LTD., VERSUS DCIT [ITA NOS. 3878/DEL/2010 & 796/DELL2011 DATED 25-01-2012] THIS HON'BLE TRIBUNAL HELD AS UND ER; '17.4 ..WE ALSO FIND THAT ASSESSEE HAS PAID TAXES AT MAXIMUM MARGINAL RATE. BOTH THE DIRECTORS HAVE ADMITT ED THE PAYMENT OF COMMISSION RECEIVED AND OFFERED THE SAME IN T HEIR INCOME TAX RETURNS AND HAD PAID AT A MAXIMUM MARGINA L RATE. THIS CLEARLY ESTABLISHES THE FACT THAT THERE HAS BEEN NO TAX AVOIDANCE MOTIVE BEHIND THE PAYMENT OF COMMISSION TO T HE DIRECTORS BY THE ASSESSEE COMPANY. WE FURTHER FIND THAT TH E CASE LAW REFERRED BY THE ID. COUNSEL OF THE ASSES!I.EE ARE A LSO GERMANE AND SUPPORT THE CASE OF THE ASSESSEE. 17.5 IN THE BACKGROUND OF THE AFORESAID DISCUSSIONS AND PRECEDENTS, IN OUR CONSIDERED OPINION, THE PAYMENT OF COMMISSION WAS JUSTIFIED AND NOT DISALLOWABLE U/S 36(1 )( II) OF THE IT ACT.' 32 II. THIS HON'BLE TRIBUNAL IN THE CASE OF DY CIT VS AGARWAL METAL WORKS LTD [I.T.A .NO.-593/DEI/2012 DA TED 11-10-2013 ITAT DELHI] HELD AS UNDER; 'THE LD. CIT (A) HAS RECORDED A CATEGORICAL FINDING THA T THESE DIRECTORS HAD PAID TAX ON THE AFORESAID BONUS ALONG WIT H SALARY ON THE MAXIMUM MARGINAL RATE AND AS SUCH THERE WAS NO L OSS TO THE REVENUE. THE ID. DR COULD NOT REFUTE THIS FINDING GIVEN BY THE LD. FIRST APPELLATE AUTHORITY. AS SUCH, WE ARE OF T HE CONSIDERED OPINION THAT THE AMOUNT OF BONUS PAID TO TH E DIRECTORS IS FULLY DEDUCTIBLE U/S 36(1 )(II) OF THE ACT A ND THE IMPUGNED ORDER DOES NOT MERIT ANY INTERFERENCE ON THI S COUNT. THIS GROUND IS NOT ALLOWED. III. HON'BLE MUMBAI TRIBUNAL IN THE CASE OF GARGI HUTTENES ALBERTUS (P) LTD. VERSUS ADDL. CIT [ITA NO . 1822/MUM/2009 DATED 18-01-2010] HELD AS UNDER; 'IN CIRCULAR NO.6-P OF 1968 DATED 6TH JULY, 1968, THE CBOT HAS EXPLAINED IN PARAGRAPH 74 THAT WHILE INVOKING THE P ROVISIONS OF THE SECTION THE ASSESSING OFFICER IS EXPECTED TO EXERCISE HIS JUDGMENT IN A REASONABLE AND FAIR MANNER AND THAT IT SHOULD BE BORNE IN MIND THAT THE SECTION IS MEANT TO CHECK EVASION OF TAX THROUGH EXCESSIVE OR UNREASONABLE PAYMENTS TO RELATIVES A ND 33 ASSOCIATE CONCERNS AND SHOULD NOT BE APPLIED IN THE MANNER WHICH WILL CAUSE HARDSHIP IN BONAFIDE CASES. THE DETAILS FI LED BY THE ASSESSEE ALSO SHOW THAT GARGI INDUSTRIES IS A COMPANY W ITH A TURNOVER OF RS. 21.68 CRORES AND A TAXABLE INCOME OF RS. 1, 16,67,9901- FOR THE ASSESSMENT YEAR 2005-06 AND IS ALSO ASSESSED TO TAX. THE ASSESSEE ITSELF HAS DECLARED A TOTAL INCOM E OF RS.8,31,43,0951-. IT CANNOT THEREFORE BE SUGGESTED THAT THE ASSESSEE WAS INDULGING IN UNFAIR MEANS TO SHIFT ITS PROFITS TO ANOTHER ENTITY. BOTH THE ASSESSEE AND GARGI INDUSTRIES A RE IN THE MAXIMUM TAX BRACKET AND THERE CAN BE NO TAX ADVANTAG E. IN THESE CIRCUMSTANCES, WE SEE NO MERIT IN THE DISALLOWANCE W HICH IS HEREBY DELETED. GROUND NO. 1 IS THUS ALLOWED. IV. IN THE CASE OF CIT VS. INDO SAUDI SERVICES (TR AVEL) P. LTD. 310 ITR 306 (BOM) WHERE THE ASSESSEE WAS A GENERAL SALES AGENT OF A FOREIGN AIRLINE S. FOR THE A. YS. 199 1-92 AND 1992-93 THE ASSESSING OFFICER FOUND THAT THE INCENTIVE COMMISSION PAID BY THE ASSESSEE TO THE SISTER CONCERN WAS HALF PERCENT MORE THAN THAT PAID TO OTHER SUB-AGENTS. RELY ING ON THE PROVISIONS OF SECTION 40A(2) OF THE INCOME-TAX ACT, 1961 , THE ASSESSING OFFICER DISALLOWED THE EXCESS COMMISSION PAID TO THE SISTER CONCERN AT THE RATE OF HALF PERCENT. THE TRIBUNAL DELETED THE ADDITIONS. 34 ON APPEAL BY THE REVENUE, THE BOMBAY HIGH COURT UPHE LD THE DECISION OF THE TRIBUNAL AND HELD AS UNDER: 'I) UNDER THE CBDT CIRCULAR NO. 6-P, DATED 061071196 8, IT IS STATED THAT NO DISALLOWANCE IS TO BE MADE ULS. 40A(2) IN RESPECT OF THE PAYMENTS MADE TO THE RELATIVES AND SISTER CONCERNS WHERE THERE IS NO ATTEMPT TO EVADE TAX. II) THE LEARNED ADVOCATE APPEARING FOR THE APPELLANT WAS NOT IN A POSITION TO POINT OUT HOW THE ASSESSEE EVADED PAYMENT OF TAX BY THE ALLEGED PAYMENT OF HIGHER COMMISSION TO ITS SISTER CONCERN SINCE THE SISTER CONCERN WAS ALSO PAYING TAX AT HIGHER RATE AND COPIES OF THE ASSESSMENT ORDERS OF THE SISTER CONCERN WERE TA KEN ON RECORD BY THE TRIBUNAL. III) IN VIEW OF THE AFORESAID ADMITTED FACTS WE ARE OF THE VIEW THAT THE TRIBUNAL WAS CORRECT IN COMING TO THE CONCLUSION THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) WAS WRONG IN DISALLOWING HALF PERCENT COMMISSION TO THE SISTER CONCERN' V. RECENTLY HON'BLE GUJARAT HIGH COURT IN THE CASE PRO CIT VS GUJARAT GAS FINANCIAL SERVICES LTD. [ITA NO. 428 & 431 OF 2015 DATED 07-07-2015] HELD AS UNDER; 35 '13. AS HAS BEEN FOUND BY US IN THE PRECEDING PARA OF T HIS JUDGMENT THAT THE RESPONDENT COMPANY AS WELL AS THE PA RENT COMPANY, BOTH ARE ASSESSED TO INCOME TAX AT THE MAXIMUM MARGINAL RATE AND, THEREFORE IT CANNOT BE SAID THAT T HE SERVICE CHARGE IS PAID TO THE RESPONDENT COMPANY AT A UNREASONA BLE RATE TO EVADE INCOME TAX. EVEN THE LEARNED COUNSEL MR . BHATT FOR THE REVENUE DOES NOT DISPUTE THIS FACT. 14. WE ARE IN AGREEMENT WITH THE OBSERVATIONS MADE BY THE TRIBUNAL AS WELL AS THE RATIO LAID DOWN BY THE COORDIN ATE BENCH OF THIS COURT IN THE CASE OF (1) COMMISSIONER OF INCOME TAX-I VS ENVIRO CONTROL ASSOCIATED (P) LTD., AS REPORTED AT (201 4) 43 TAXMANN.COM 291 (GUJARAT); (2) COMMISSIONER OF INCOME T AX- III VS ASHOK J PATEL, AS REPORTED AT (2014) 43 TAXMANN . COM 227 (GUJARAT) AND (3) COMMISSIONER OF INCOME TAX VS IND O SAUDI SERVICES (TRAVEL) P. LTD. AS REPORTED AS (2009) 3 10 ITR 306 (BOM). 15 IT IS PERTINENT TO NOTE THAT SO FAR AS THE CIRCULAR DATED 6.7. 1968 IS CONCERNED, IT MAKES CLEAR THAT THE PROVISIONS UNDE R SECTION 40A (2) AND PARTICULARLY WITH REGARD TO THE T RANSACTION BETWEEN THE RELATIVES AND ASSOCIATES IS CONCERNED, THE SAME 36 SHALL BE TREATED AS BONA FIDE CASE UNLESS THE OFFICER FIND S IT THAT ONE OF THEM IS TRYING TO EVADE PAYMENT OF TAX. 16 CONSIDERING THE OVERALL FACTS OF THE CASE AND THE RAT IO LAID DOWN BY THE HON'BLE APEX COURT, WE ARE OF THE OPINIO N THAT THE APPEALS ARE MERITLESS AND THE SAME DESERVE TO BE DISMISSE D AND ACCORDINGLY DISMISSED.' 14. WE FURTHER NOTE THAT THE VIEW ADOPTED BY THE A O THAT, ASSESSEE COMPANY GIVEN THE BONUS TO A SINGLE DIRECTOR, CANNOT B E A GROUND FOR DISALLOWING THE CLAIM BECAUSE IN THE CASE OF COMMISSIONE R OF INCOME-TAX, BOMBAY VERSUS WALCHAND AND COMPANY PVT. LIMITED [1967] 65 ITR 381 (SC) THE HON'BLE SUPREME COURT ACCORDED THE VIEW TAKEN BY HON'BLE HIGH COURT OF BOMBAY AS UNDER:- 'THE HIGH COURT ON A CAREFUL CONSIDERATION HAS POINTED O UT THAT THE WORK OF THE ASSESSEE HAS INCREASED CONSIDERABLY AND HA S BECOME MORE STRENUOUS BY REASON OF THE PROSPERITY OF TH E MANAGED COMPANIES AND IT WOULD BE REASONABLE AND NATUR AL TO INFER THAT 'THE STRAIN ON BOTH THE DIRECTORS AND THE T OP EXECUTIVES HAD INCREASED JUSTIFYING INCREASE IN THEIR REMUNERATION'. IN THEIR VIEW THE FACT THAT ADDITIONA L REMUNERATION WAS NOT SANCTIONED IN FAVOUR OF OTHER EXE CUTIVE OFFICERS IS BY ITSELF NOT A GROUND FOR REGARDING THE EX PENDITURE INCURRED AS OTHERWISE THAN WHOLLY AND EXCLUSIVELY LAID O UT OR EXPENDED FOR THE PURPOSE OF THE BUSINESS. WE AGREE WITH THE HIGH COURT THAT THE ORDER OF THE TRIBUNAL DISALLOWING THE CLAIM 37 FOR ALLOWANCE OF THE WHOLE OF THE ADDITIONAL REMUNER ATION WAS NOT SUPPORTED BY ANY EVIDENCE. THE APPEALS THEREFORE FAIL AND ARE DISMISSED WITH COSTS.' 15. IN THE BACKGROUND OF THE AFORESAID DISCUSSIONS AND RE SPECTFULLY FOLLOWING THE PRECEDENTS, AS AFORESAID, WE DELETE THE ADDITION IN DISPUTE AND CANCEL THE ORDERS OF THE REVENUE AUTHORITIES AND ACCORDI NGLY, GROUND RAISED BY THE ASSESSEE STAND ALLOWED. 16. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE STANDS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 19/05/2017. SD/- SD/- [PRASHANT MAHARISHI] [H.S. SIDHU] ACCOUNTANT MEMBER JUDICIAL MEMBER DATE: 19/05/2017 SRBHATNAGAR COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY OR DER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES