DCIT, New Delhi V. M/s. Expo Mechaneqe Mkt. Pvt. Ltd., New Delhi

ITA 243/DEL/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4202 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 3 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-04-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 05-04-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 15-01-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: STEPHEN GEORGE
• Keywords: Fair market value
• Section: 143(3); 37

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES B: NEW DELHI BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER ITA NOS. 243 & 3376/DEL/2010 ASSESSMENT YEARS: 2006-07 & 2007-08 DCIT, VS. EXPO MECHANIQUE P. LTD., CIRCLE 11(1), 46, PARAPARA BUILDING, C.R. BUILDING, HAUZ KHAS VILLAGE, NEW DELHI. NEW DELHI. AAACF2675D (APPELLANT) (RESPONDENT) APPELLANT BY : STEPHEN GEORGE, CIT(DR) RESPONDENT BY : K. SAMPATH, ADV. ORDER PER I.P. BANSAL, J.M. BOTH THESE APPEALS ARE FILED BY THE REVENUE. THE Y ARE DIRECTED AGAINST TWO SEPARATE ORDERS PASSED BY LD. CIT(A) DA TED 3.11.09 AND 27.4.10 FOR ASSESSMENT YEARS 2006-07 & 07-08. 2. IN BOTH THE APPEALS THE ISSUE IS IDENTICAL. THE GROUNDS OF APPEAL ARE IDENTICAL AND READ AS UNDER: - 1. THE ORDER OF LD. CIT(A) IS WRONG, PERVERSE, IL LEGAL AND AGAINST THE PROVISION OF LAW, LIABLE TO BE SET ASIDE. ITA NOS. 243 & 3376/D/2010 2 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE OF EXCESS SALARY PAID TO ITS DIRECTORS U/S 40(2)(B) TO THE EXTENT OF RS. 2.5 CRORES. 3. THE CIT(A) HAS ERRED IN RELYING UPON THE DECISI ON OF HONBLE HIGH COURT IN THE CASE OF SHRI RAM PISTON & RINGS LTD., ITR 23 0 & PROVISIONS OF THE COMPANIES ACT, 1956 WHICH IS NOT RELEVANT TO A PVT. LTD. COMPANY. 4. THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AME ND ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF HEARING. 3. BOTH THESE APPEALS WERE ARGUED TOGETHER BY BOTH THE PARTIES, HENCE FOR THE SAKE OF CONVENIENCE BOTH OF THEM ARE BEING DISPOSED OFF BY THIS CONSOLIDATED ORDER. 4. FOR A.Y. 06-07 THE RETURN OF INCOME WAS FILED BY THE ASSESSEE AT 47,50,000/- AND ASSESSMENT HAS BEEN FRAMED VIDE IMP UGNED ORDER DATED 22.12.08 PASSED U/S 143(3) OF THE INCOME TAX ACT, 1 961 (ACT) AND THE INCOME OF THE ASSESSEE HAS BEEN ASSESSED AT 2,97,50 ,000/- BY MAKING AN ADDITION OF RS. 2,50,00,000/- BEING DISALLOWANCE U/ S 40A(2)(B) ON ACCOUNT OF EXCESS SALARY DEBITED TO PROFIT & LOSS A/C PAID BY THE ASSESSEE TO ITS DIRECTORS. IT WAS NOTICED BY THE AO THAT DURING TH E YEAR UNDER CONSIDERATION THE ASSESSEE HAD PAID SALARY OF RS. 1,05,00,000/- E ACH TO ITS DIRECTORS NAMELY SH. RAJIV GUPTA, SMT. DEEPIKA GUPTA AND SH. SANJAY GUPTA. IT WAS ALSO NOTICED THAT FOR IMMEDIATE PRECEDING YEAR SALA RY PAID TO DIRECTORS WAS ONLY A SUM OF RS. 1,14,00,000/- AND THE SALARY WAS ALLOWED ONLY FOR 45 LACS AGAINST 1,14,00,000/- AND RS. 69 LAKH WAS DISALLOWE D U/S 40A(2)(B) OF THE ACT. IT WAS ALSO NOTICED THAT DURING A.Y. 2006-07, THERE IS MARGINAL INCREASE ITA NOS. 243 & 3376/D/2010 3 IN THE TURNOVER OF THE ASSESSEE WHICH WAS INCREASED TO 16,81,22,295/- AGAINST EARLIER YEARS TURNOVER OF 16,16,16,137/-. THE ASSESSEE WAS REQUIRED TO EXPLAIN THAT WHY THERE WAS INCREASE IN THE SALARY OF THE DIRECTORS. IT WAS SUBMITTED THAT PROFIT EARNED DUR ING THE YEAR WAS THE RESULT OF EFFICIENT AND DEDICATED EFFORTS OF THE DIRECTORS OF THE COMPANY. THE AO DID NOT ACCEPT SUCH CONTENTION OF THE ASSESSEE AS A CCORDING TO HIM ASSESSEE COULD NOT FURNISH ANY EVIDENCE TO SUBSTANT IATE HUGE INCREASE IN SALARY WHICH COULD NOT BE ALLOWED IN FULL. HE OBSE RVED THAT DIRECTORS ARE IN TOTAL CONTROL OF THE COMPANY AND ARE IN A POSITION TO TAKE ANY DECISION IN RESPECT OF COMPANY. HE ALSO OBSERVED THAT PAYMENTS MADE TO DIRECTORS ARE COVERED BY THE PROVISIONS OF SEC. 40A(2)(B) OF THE ACT WHICH WAS TO BE ALLOWED AT COMPARATIVE MARKET RATES. AS ASSESSEE D ID NOT FURNISH ANYTHING TO SHOW THAT SALARY PAID TO DIRECTORS WAS AT MARKET RATE, THE AO ALLOWED THE SALARY ONLY TO THE EXTENT OF RS. 65 LAKH AND BALANC E OF 2,50,00,000/- WAS DISALLOWED U/S 40A(2)(B) AND WAS ADDED TO THE INCOM E OF THE ASSESSEE. 5. IN SIMILAR MANNER, FOR A.Y. 07-08 THE RETURN OF INCOME WAS FILED AT 40,03,700/-. THE ASSESSEE HAD PAID SALARY OF RS. 1 ,20,00,000/- TO SH. RAJIV GUPTA AND RS. 1,10,00,000/- EACH TO SMT. DEEPIKA GU PTA AND SH. SANJAY GUPTA. THE AO REFERRED THAT FOR A.Y. 2006-07 IN WH ICH THE SALARY PAID TO DIRECTORS WAS TREATED AS EXCESSIVE AND REFERRING TO THE A.Y. 05-06 AND 06- 07 HE ALLOWED THE SALARY ONLY TO THE EXTENT OF RS. 90 LAKH AND BALANCE SUM OF RS. 2,50,00,000/- WAS DISALLOWED U/S 40A(2)(B) A ND WAS ADDED TO THE ITA NOS. 243 & 3376/D/2010 4 INCOME OF THE ASSESSEE BY MAKING ASSESSMENT AT AN I NCOME OF RS. 2,90,03,700/- AGAINST THE RETURNED INCOME OF RS. 40 ,03,700/-. 6. LD. CIT(A) FOR BOTH THE YEARS HAS DELETED THE AD DITION ON THE BASIS OF ITAT DECISION IN RESPECT OF A.Y. 06-07, WHEREIN THE DISALLOWANCE MADE BY THE AO AND UPHELD BY LD. CIT(A) WAS DELETED AS PER PARA 6 OF THE ORDER DATED 28.8.09 IN ITA NO. 3795/DEL/08. COPY OF SUCH ORDER HAS ALSO BEEN FILED BY THE ASSESSEE IN THE PAPER BOOK FOR A.Y. 06 -07 AT PAGES 4 TO 8. IT MAY ALSO BE MENTIONED HERE THAT THE SAID ORDER OF T HE TRIBUNAL WAS SUBJECT MATTER OF THE APPEAL BY THE DEPARTMENT BEFORE HONB LE DELHI HIGH COURT AND HONBLE DELHI HIGH COURT VIDE ORDER DATED 17.8.10 I N ITA NO.1154/2010 IN THE CASE OF CIT VS. EXPO MECHANIC MARKET PVT. LTD. HAS UPHELD THE ORDER OF THE TRIBUNAL. COPY OF SUCH ORDER IS FILED AT PAGES 1 TO 5 OF THE PAPER BOOK. THE DEPARTMENT IS AGGRIEVED, BY THE DELETION MADE B Y LD. CIT(A) AND HENCE HAS FILED BOTH THE APPEALS. 7. AFTER NARRATING THE FACTS, IT WAS VEHEMENTLY PLE ADED BY LD. DR THAT THERE WAS ABNORMAL INCREASE IN THE SALARY PAID TO T HE DIRECTORS AS COMPARED TO THE IMMEDIATE PRECEDING YEAR HENCE, HE PLEADED T HAT THE RATIO OF THE DECISION OF TRIBUNAL AS WELL AS HONBLE HIGH COURT COULD NOT BE APPLIED TO THE FACTS OF THE PRESENT CASE. IT WAS SUBMITTED TH AT THE TOTAL SALARY PAID TO DIRECTORS HAS BEEN INCREASED TO A SUM OF RS. 3,15,0 0,000/- AGAINST TOTAL SALARY PAID IN THE EARLIER YEAR OF RS. 1,14,00,000/ -. HE SUBMITTED THAT THERE IS MARGINAL INCREASE IN THE TURNOVER, THEREFORE, TH ERE WAS NO JUSTIFIED REASON ITA NOS. 243 & 3376/D/2010 5 IN INCREASING THE SALARY TO THAT EXTENT. THEREFORE , HE PLEADED THAT DISALLOWANCE WAS RIGHTLY MADE BY THE AO AND CIT(A) WAS WRONG IN DELETING THE ADDITION BY SIMPLY FOLLOWING THE ORDER OF THE T RIBUNAL IN ASSESSEES OWN CASE FOR EARLIER YEAR AS THERE IS A DIFFERENCE IN F ACTS OF THE PRESENT YEARS AS COMPARED TO THE FACTS OF THAT YEAR. 8. ON THE OTHER HAND, RELYING UPON THE ORDER OF THE TRIBUNAL AND DECISION OF HONBLE HIGH COURT IN THE CASE OF THE A SSESSEE, IT WAS SUBMITTED BY LD. AR THAT THOUGH THERE WAS A MINOR INCREASE IN THE TURNOVER BUT THERE WAS A SUBSTANTIAL INCREASE IN THE PROFITS BEFORE PA YMENTS OF REMUNERATION TO THE DIRECTORS. HE SUBMITTED THAT THIS POSITION HAS BEEN SUMMARIZED IN THE CHART AT PAGE 9 FOR A.Y. 2006-07 AND AT PAGE 9 OF F OR 2007-08: - M/S EXPO MECANIQUE MARKETING PVT. LTD. ASSESSMENT YEAR 2006-07 COMPARATIVE PROFITABILITY CHART OF ASSESSMENT YEAR 2006-07 WITH 2005-06 S.NO. PARTICULARS A.Y. 2005-06 A.Y. 2006-07 1. TURNOVER 1616.16 1681.22 2. A. PROFIT BEFORE CHARGING REMUNERATION 153 362.37 B. % OF PROFIT TO TURNOVER 9.47% 21.55% 3. REMUNERATION PAID DURING THE YEAR 114 315 4. A. PROFIT AFTER CHARGING REMUNERATION 39 47.37 B. % OF PROFIT TO TURNOVER 2.41% 2.81% M/S EXPO MECANIQUE MARKETING PVT. LTD. ASSESSMENT YEAR 2007 - 08 COMPARATIVE PROFITABILITY CHART OF ASSESSMENT YEAR 2007 - 08 WITH 2005 - 06 S.NO. PARTICULARS A.Y. 2005 - 06 A.Y. 2007 - 08 1. TURNOVER 1616.16 1345 2. A. PROFIT BEFORE CHARGING REMUNERATION 153 380 B. % OF PROFIT TO TURNOVER 9.47% 28.25% 3. REMUNERATION PAID DURING THE YEAR 114 340 4. A. PROFIT CHARGING REMUNERATION 39 40 ITA NOS. 243 & 3376/D/2010 6 B. % OF PROFIT TO TURNOVER 2.41% 2.97% 9. HE SUBMITTED THAT AS IT CAN BE SEEN FROM THE ABO VE CHART THAT THE PROFIT BEFORE CHARGING REMUNERATION FOR A.Y. 2005-0 6 WAS ONLY 1,53,00,000/- WHEREAS IT WAS INCREASED TO 3,62,00,000/- AND IF TH E PERCENTAGE WISE COMPARISON IS MADE THEN ASSESSEE HAS PAID REMUNERAT ION FOR A.Y. 2006-07 TO 2.81% AS AGAINST 2.41% PAID FOR A.Y. 2005-06. T HUS, HE PLEADED THAT THE PAYMENT MADE TO DIRECTORS IS JUSTIFIED AND IS N OT OUT OF THE CONTEXT. SIMILARLY, HE PLEADED THAT INCREASE IN THE DIRECTOR S REMUNERATION IN 2007-08 IS MARGINAL AS THERE WAS MARGINAL INCREASE IN THE P ROFIT BEFORE CHARGING REMUNERATION. HE SUBMITTED THAT ACCORDING TO WELL ESTABLISHED LAW ONUS IS ON THE ITO TO BRING MATERIAL ON RECORD TO JUSTIFY T HE DISALLOWANCE TO BE MADE U/S 40A(2)(B). HE IN THIS REGARD REFERRED TO THE F OLLOWING DECISIONS: - 1. JAGDAMBA ROLLER FLOOR MILLS LTD. VS. ACIT 117 I TD 260 (NAG.) (THIRD MEMBER) 2. S.K. ENGINEERING VS. JCIT 103 ITD 97. 10. HE FURTHER SUBMITTED THAT UNLESS IT IS SHOWN TH AT TRANSACTION WAS NOT BONAFIDE ONE OR TO BE A SHAM OR THE SALARY PAID BY THE ASSESSEE WAS NOT WHAT WAS SHOWN IN THE BOOKS OF ACCOUNT, IT IS NOT O PEN TO REVENUE TO DISREGARD THE TRANSACTION SHOWN IN THE BOOKS OF ACC OUNT. REFERENCE IN THIS REGARD WAS MADE TO THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF MARGHA BHAI KISHA BHAI PATEL & COMPANY VS. CIT 1 08 ITR 54 (GUJ.). ITA NOS. 243 & 3376/D/2010 7 11. THUS, IT WAS PLEADED THAT LD. CIT(A) HAS RIGHTL Y DELETED THE DISALLOWANCE AND HIS ORDER SHOULD BE UPHELD. LD. A R SUBMITTED THAT THE PAYMENT MADE BY THE ASSESSEE TO ITS DIRECTORS AS SA LARY IS BONAFIDE PAYMENT. HE SUBMITTED THAT FROM THE CALCULATION OF TAX PLACED AT PAGES 10 OF THE RESPECTIVE PAPER BOOKS, IT CAN BE SEEN THAT THE TAX BORNE BY THE DIRECTORS IS ALMOST SIMILAR TO THE TAX TO BE BORNE BY THE ASSESSEE COMPANY IN CASE THE SALARY WAS NOT PAID TO THE DIRECTORS. HE SUBMITTED THAT FOR A.Y. 2006-07 THE TAX ON THE PROFITS BEFORE DIRECTORS REM UNERATION IN THE HANDS OF COMPANY WILL BE 1,06,00,000/-. IN PLACE OF THE SAI D TAX THE TAX PAID IN THE HANDS OF THE DIRECTORS ARE 1.04,46,000/-. SIMILARL Y FOR A.Y. 2007-08 TAX IN THE HANDS OF THE COMPANY WILL BE 1,14,44,000/- IN P LACE OF TAX BORNE BY THE DIRECTORS AT RS. 1,13,47,000/-. THUS, HE PLEADED T HAT ADDITION HAS RIGHTLY BEEN DELETED IN THE HANDS OF THE ASSESSEE COMPANY A S NO CASE HAS BEEN MADE OUT BY THE AO FOR APPLICATION OF SEC. 40A(2)(B ). 12. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS IN THE LIGHT OF MATERIAL PLACED BEFORE US. LD. CIT(A) HAS DELETED THE DISALLOWANCE FOLLOWING THE DECISION OF TRIBUNAL GIVEN IN THE CAS E OF ASSESSEE FOR A.Y. 2005-06, WHEREBY THE ADDITION OF RS. 69 LAKH MADE U /S 40A(2)(B) WAS DELETED ON THE GROUND THAT AO DID NOT BRING ON RECO RD ANY MATERIAL TO INVOKE THE PROVISIONS OF SEC. 40A(2) OF THE ACT. IT WAS O BSERVED THAT THE PAYMENT OF SALARY IS MADE ACCORDING TO THE LEGITIMATE BUSIN ESS NEEDS OF THE ASSESSEE AND IT IS WELL SETTLED LAW THAT BENEFIT DE RIVED OR ACCRUED TO THE ASSESSEE FROM THE GOODS, SERVICES OR FACILITIES ARE NOT TO BE JUDGED FROM THE ITA NOS. 243 & 3376/D/2010 8 VIEW POINT OF REVENUE OFFICER, BUT FROM THE VIEW PO INT OF A BUSINESSMAN. THE AO DID NOT BRING ANY MATERIAL ON RECORD TO SUPP ORT HIS CONTENTION THAT REMUNERATION PAID TO EMPLOYEES, WHO HAPPENED TO BE DIRECTORS OF THE ASSESSEE COMPANY, WAS EXCESSIVE AS COMPARED TO THE MARKET CONDITIONS. 13. FOR THE YEARS UNDER CONSIDERATION ALSO THE AO H AS NOT BRING ANY MATERIAL ON RECORD TO JUSTIFY THE DISALLOWANCE MADE U/S 40A(2)(B). IT IS CLEAR THAT WHATEVER WAS PAID BY THE ASSESSEE IN IMMEDIATE PRECEDING FINANCIAL YEAR WAS HELD ALLOWABLE BY THE TRIBUNAL AND THE ORD ER OF THE TRIBUNAL WAS UPHELD BY HONBLE HIGH COURT. IF THE FACTS OF A.Y. 2005-06 ARE SEEN IT IS OBTAINED THAT THE ASSESSEE HAD GIVEN SALARY OF RS. 30 LAKH EACH TO SHRI RAVI GUPTA AND DEEPIKA GUPTA AND RS. 42 LAKH TO SHR I SANJAY GUPTA. IT WAS NOTICED THAT FOR IMMEDIATE PRECEDING YEAR (A.Y. 2004-05) THOSE VERY DIRECTORS WERE PAID SALARY ONLY TO THE EXTENT OF RS . 9,60,000/- AND THUS, THERE WAS INCREASE IN THE SALARY ALMOST EIGHT TIMES AS AGAINST INCREASE IN SALES OF APPROXIMATELY THREE TIMES. IT WAS NOTICED THAT SHRI RAVI GUPTA WAS PGD IN POLYMER TECHNOLOGY (DU) PLASTIC AND HAD EXPE RIENCED OF OVER TEN YEARS IN THE LINE. SMT. DEEPIKA GUPTA HAD ALSO EXP ERIENCED IN THE LINE FOR OVER TEN YEARS. THE DIRECTORS EFFICIENT AND DEDIC ATE EFFORTS PRODUCED RESULTS. THEY WORKED DAY AND NIGHT AND THERE WERE GIVEN SUFFICIENT REASON FOR THE HUGE INCREASE IN THE SALARY AND ON THESE FA CTS IT WAS HELD BY THE TRIBUNAL THAT DISALLOWANCE WAS NOT CALLED FOR. NOW IF THE FACTS OF THE PRESENT YEARS ARE EXAMINED IN THE LIGHT OF FACTS FOR A.Y. 2 005-06 IT CAN BE SEEN THAT THERE ARE MORE JUSTIFIED REASONS FOR INCREASE IN SA LARY. IN A.Y. 2006-07, ITA NOS. 243 & 3376/D/2010 9 THOUGH INCREASE IN THE TURNOVER IS MARGINAL AS IT I NCREASED TO 16,81,22,295/- AGAINST THE TURNOVER OF 16,16,16,137/- FOR A.Y. 200 5-06 BUT THERE IS SUBSTANTIAL INCREASE IN THE NET PROFIT BEFORE REMUN ERATION PAID. IT CAN BE OBSERVED FROM THE AFOREMENTIONED TABLE GIVEN IN PAR A 8, THE PROFIT BEFORE CHARGING REMUNERATION HAD INCREASED TO 3,62,37,000/ - FROM SIMILAR PROFIT OF RS. 1,53,00,000/- IN A.Y. 2005-06. IN OTHER WORDS, THE INCREASE IN PROFIT BEFORE CHARGING REMUNERATION WAS TO THE EXTENT OF 2 1.55% AGAINST IMMEDIATE PRECEDING YEAR PROFIT OF 9.47%. THUS, IT CANNOT BE SAID THAT THERE WAS NO INCREASE IN THE PROFITABILITY OF THE ASSESSE E COMPANY. THE INCREASE IN THE REMUNERATION IS 2.76 TIMES AS AGAINST INCREA SE IN SIMILAR REMUNERATION OF EARLIER YEAR WHICH WAS ALMOST EIGHT TIMES. THE INCREASE IN THE SALARY FOR A.Y. 2006-07 IS JUSTIFIED EVEN IF IT IS SEEN IN THE LIGHT OF INCREASE IN PROFIT BEFORE CHARGING REMUNERATION AS THERE IS INCREASE IN THE NET PROFIT OF 2.27 TIMES AGAINST INCREASE IN SALARY OF 2.76 TIMES. THUS, IT CANNOT BE SAID THAT THERE WAS UNREASONABLE INCREASE IN THE SALARY PAID TO THE DIRECTORS. 14. SIMILARLY, FOR A.Y. 2007-08 THE INCREASE IN SAL ARY IS MARGINAL AS THE SALARY PAID BY THE ASSESSEE IS 3,40,00,000/- AS COM PARED TO SALARY PAID FOR A.Y. 2006-07 AT 3.15 CRORE AND THERE IS INCREASE IN THE PROFIT BEFORE REMUNERATION THAT HAS INCREASED TO 3.80 CRORE AS AG AINST 362.37 CRORE. THERE IS NO SUBSTANTIAL INCREASE IN THE SALARY PAID TO DIRECTORS FOR THAT YEAR. ITA NOS. 243 & 3376/D/2010 10 15. IN THE LIGHT OF ABOVE FACTS, WE FOUND THAT THER E IS NO FORCE IN THE CONTENTION OF LD. DR THAT THERE WAS UNREASONABLE IN CREASE IN THE SALARY PAID TO THE DIRECTORS AND HENCE, RATIO OF THE DECISION O F TRIBUNAL IN ASSESSEES CASE FOR A.Y. 2005-06 COULD NOT BE APPLIED. IT IS O BSERVED THAT THERE WAS NO UNREASONABLE INCREASE IN THE SALARY PAID TO THE DIR ECTORS WHEN IT WAS COMPARED TO THE NET PROFIT EARNED BY THE ASSESSEE C OMPANY. THEREFORE, WE SEE NO INFIRMITY IN THE ORDER OF CIT(A) VIDE WHICH THE IMPUGNED ADDITIONS ARE DELETED. 16. WE ALSO FOUND FORCE IN THE CONTENTION OF LD. AR THAT THE ONUS IS ON THE DEPARTMENT TO PROVE THAT WHAT WAS PAID BY THE A SSESSEE WAS EXCESSIVE IN CASE HE WANTS TO MAKE DISALLOWANCE U/S 40A(2)(B) . IN THIS REGARD RELIANCE HAS BEEN PLACED ON THE DECISION OF NAGPUR ITAT IN THE CASE OF JAGDAMBA ROLLER FLOOR MILLS LTD. VS. ACIT (SUPRA), WHEREIN IT WAS OBSERVED THAT THE EXPENDITURE ON ACCOUNT OF REMUNERATION PAI D TO THE EMPLOYEES IS GOVERNED BY THE PROVISIONS OF SEC. 37 OF THE ACT. A PART OF SUCH EXPENDITURE CAN DISALLOWED IF IT IS SHOWN (I) THAT THE PAYMENT WAS MADE TO THE PERSONS SPECIFIED IN CLAUSE (B) OF SEC. 40A(2) AND (II) IF IT IS FOUND THAT EXPENDITURE IS EXCESSIVE OR UNREASONABLE, HAVING REGARD TO THE MAR KET VALUE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MAD E. THE AO IS DUTY BOUND REQUIRED TO MAKE ENQUIRY WHETHER SUCH EXPENDITURE I S EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE SERVICES RENDERED. THE AO CANNOT SIMPLY COMPARE SALARY OF T HE PRESENT YEAR WITH THE SALARY OF THE LAST YEAR. THE SCOPE OF ENQUIRY U /S 40A(2)(B) IS WITH ITA NOS. 243 & 3376/D/2010 11 REFERENCE TO THE FAIR MARKET VALUE OF THE SERVICES RENDERED AND IN ABSENCE OF SUCH ENQUIRY NO DISALLOWANCE COULD HAVE BEEN MAD E OR SUSTAINED. THE ONUS IS ON THE AO TO BRING MATERIAL ON RECORD TO PR OVE THAT THE PAYMENT MADE BY THE ASSESSEE WAS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE SERVICES RENDERED AND THE BURDEN WOULD SHIFT ONLY IN THE CIRCUMSTANCES IF SOME MATERIAL OR EVIDENCE IS B ROUGHT ON RECORD TO INDICATE THAT PAYMENT APPEARED TO BE EXCESSIVE OR U NREASONABLE. SIMILARLY IT WAS HELD IN THE CASE OF S.K. ENGINEERING VS. JCI T (SUPRA) THAT ONUS IS ON THE AO TO PROVE THAT THE PAYMENT IS EXCESSIVE AND U NREASONABLE. 17. IT IS ALSO THE CASE OF THE LD. AR THAT ALL THE DIRECTORS OF THE ASSESSEE COMPANY ARE ALMOST ASSESSED AT A MAXIMUM RATE OF TA X. HE HAS SUBMITTED BEFORE US THE CALCULATION IN THIS REGARD. FOR A.Y. 2006-07 THE CALCULATION SUBMITTED BY HIM IS AS UNDER: - M/S EXPO MECANIQUE MARKETING PVT. LTD. ASSESSMENT YEAR 2006 - 07 COMPARATIVE TAXABILITY CHART FOR STATUS AS COMPANY VIS - - VIS INDIVIDUAL IF NO SALARY WOULD HAVE BEEN PAID TO DIRECTORS AMOUNT (RS.) (IN LAKH) 1. IN CASE OF COMPANY (M/S EXPO MECANIQUE MARKETIN G PVT. LTD. PROFIT BEFORE DIRECTORS REMUNERATION 362.5 TAX PAYABLE ON ABVOE @ 30% (INCL. SURCHARGE @ 10% & EDU CES @ 2%) 122 TAX ACTUALLY PAID BY THE COMPANY 16 DIFFERENTIAL TAX INCIDENCE 106 2. IN CASE OF DIRECTORS SANJAY GUPTA RAVI GUPTA DEEPIKA GUPTA TOTAL INCOME INCLUDING SALARY 105 106.87 105.72 SALARY 105 105 105 INCOME EXCLUDING SALARY 0 1.87 0.72 TAX PAYABLE ON ABOVE 0 0.2 0.07 0.27 ITA NOS. 243 & 3376/D/2010 12 (INCL. EDU. CESS @ 2%) TAX ACTUALLY PAID BY DIRECTORS 34.69 34.94 34.83 104.46 DIFFERENTIAL TAX INCIDENCE 104.19 18. SIMILARLY FOR A.Y. 2007-08 THE CALCULATION SUBM ITTED ARE AS UNDER: - M/S EXPO MECANIQUE MARKETING PVT. LTD. ASSESSMENT YEAR 20 07 - 08 COMPARATIVE TAXABILITY CHART FOR STATUS AS COMPANY VIS - - VIS INDIVIDUAL IF NO SALARY WOULD HAVE BEEN PAID TO DIRECTORS AMOUNT (RS.) (IN LAKH) 1. IN CASE OF COMPANY (M/S EXPO MECANIQUE MARKETIN G PVT. LTD. PROFIT BEFORE DIRECTORS REMUNERATION 380 TAX PAYABLE ON ABVOE @ 30% (INCL. SURCHARGE @ 10% & EDU CES @ 2%) 127.91 TAX ACTUALLY PAID BY THE COMPANY 13.47 DIFFERENTIAL TAX INCIDENCE 114.44 2. IN CASE OF DIRECTORS SANJAY GUPTA RAVI GUPTA DEEPIKA GUPTA TOTAL INCOME INCLUDING SALARY 111.44 121.64 110.67 SALARY 110 120 110 INCOME EXCLUDING SALARY 1.44 1.64 0.67 TAX PAYABLE ON ABOVE (INCL. EDU. CESS @ 2%) 0.04 0.08 NIL 0.12 TAX ACTUALLY PAID BY DIRECTORS 36.95 39.99 36.65 113.59 DIFFERENTIAL TAX INCIDENCE 113.47 DIFFERENCE IN TAX IS A MEAGER RS. 97,000/ - 19. THE ABOVE CALCULATION WILL CLEARLY SHOW THAT TH ERE WAS NO INTENTION OF THE ASSESSEE TO PAY LESSER TAX AS TAX IN BOTH THE C ASES WILL BE ALMOST SAME AS MAY BE BORNE BY THE ASSESSEE COMPANY OR BORNE BY ITS DIRECTORS. THIS SHOWS THE BONAFIDE OF THE TRANSACTION WHICH HAS TO BE ACCEPTED IN THE LIGHT OF DECISION OF HONBLE GUJARAT HIGH COURT IN THE CA SE OF MARGHA BHAI KISHA BHAI PATEL & COMPANY (SUPRA). ITA NOS. 243 & 3376/D/2010 13 20. IN VIEW OF ABOVE DISCUSSION, WE FOUND NO INFIRM ITY IN THE ORDER OF CIT(A) VIDE WHICH IMPUGNED ADDITIONS HAVE BEEN DELE TED. THEREFORE, WE DECLINE TO INTERFERE IN THE DELETION MADE BY LD. CI T(A) AND BOTH THE APPEALS FILED BY THE REVENUE ARE DISMISSED. ORDER WAS PRONOUNCED IN THE OPEN COURT ON 21.4.11 SD/- SD/- (A.K. GARODIA) (I.P. BANSAL) ACCOUNTANT MEMBE R JUDICIAL MEMBER * KAVITA DATED: 21.4.11 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR TRUE COPY BY ORDER DEPUTY REGISTRAR ITAT