M/s. Econix Hi-Tech Compondents Pvt.Ltd., Baroda V. The Dy.CIT., Circle-1(2), Baroda

ITA 2624/AHD/2010

• Counselvise Citation: 262420514 RSA 2010
• Duration Of Justice: 2 year(s) 11 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-08-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 12-08-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 06-09-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K C MATHEWS
• Keywords: Fair market value

Judgement Text

, , , , , , , , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD . , !' # $ $ $ $ % &', # BEFORE SHRI A.MOHAN ALANKAMONY,ACCOUNTANT MEMBER AND SHRI KUL BHARAT, JUDICIAL MEMBER ./ I.T.A. NO.2624/AHD/2010 ( ) $*) ) $*) ) $*) ) $*) / / / / ASSESSMENT YEAR : 2006-07) ECONIX HI-TECH COMPONENTS PVT.LTD. 12, GIDC ESTATE MAKARPURA, BARODA / VS. THE DCIT CIRCLE-1(2) BARODA #+ !' ./,- ./ PAN/GIR NO. : AAACE 4966 E ( +. / // / APPELLANT ) .. ( /0+. / RESPONDENT ) +. 1 ! / APPELLANT BY : SHRI SUNIL TALATI, AR /0+. 2 1 ! / RESPONDENT BY : SHRI K.C. MATHEWS, SR.D.R. %$3 2 '' / / / / DATE OF HEARING : 12/ 08 /2013 4* 2 '' / DATE OF PRONOUNCEMENT : 14/ 08 /2013 !5 / O R D E R PER SHRI KUL BHARAT, JUDICIAL MEMBER : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LD.COMMISSIONER OF INCOME TAX(APPEALS)-I, BARODA ( CIT(A) FOR SHORT) DATED 27.7.2010 PERTAINING TO ASSESSMENT YE AR (AY) 2006-07. THE SOLITARY GROUND RAISED BY THE ASSESSEE, WHICH R EADS AS UNDER:- YOUR APPELLANT BEING DISSATISFIED WITH THE ORDER DA TED 27.07.2010 PASSED BY THE HONBLE COMMISSIONER OF INCOME TAX (A PPEALS)-I, BARODA PRESENTS THIS APPEAL AGAINST THE SAID ORDER ON THE FOLLOWING AMONGST OTHER GROUNDS:- ITA NO.2624 /AH D/2010 ECONIX HI-TECH COMPONENTS P.LTD.VS. DCIT ASST.YEAR 2005-06 - 2 - 1. THE ORDER PASSED BY THE HONBLE COMMISSIONER OF INC OME TAX (APPEALS)-I IS BAD IN LAW, CONTRARY TO LEGAL PRONOU NCEMENTS AND SAME BE QUASHED. THE HONBLE CIT(A)-I HAS ERRED IN CONFIRMING THE DI SALLOWANCE OF RS.4,80,000 OUT OF DIRECTORS REMUNERATION BY INVOKI NG PROVISIONS OF SEC.40A(2)(B) OF THE ACT. YOUR APPELLANT SUBMITS T HAT THE HONBLE CIT(A) HAS NOT APPRECIATED THE FACTS SUBMITTED DURI NG THE COURSE OF HEARING AND HAS WRONGLY ARRIVED AT THE CONCLUSION A BOUT THE UNREASONABLE AND EXCESS REMUNERATION PAID TO THE DI RECTORS. THE SAME IS UNJUST AND UNCALLED FOR AND BE DELETED. 2. BRIEFLY STATED FACTS ARE THAT THE CASE OF THE AS SESSEE WAS PICKED UP FOR SCRUTINY ASSESSMENT AND THE ASSESSMENT U/S.143( 3) OF THE INCOME TAX ACT,1961 (HEREINAFTER REFERRED TO AS THE ACT) WAS FRAMED VIDE ORDER DATED 16/12/2008, THEREBY THE ASSESSING OFFICER(AO) MADE DISALLOWANCE OF PAYMENT OF ROYALTY OF RS.9,52,810/-, DISALLOWANC E OF BAD DEBT OF RS.6,62,761/- AND DISALLOWANCE OF EXCESS REMUNERATI ON TO DIRECTOR OF RS.4,80,000/-. AGAINST THIS, THE ASSESSEE PREFER RED AN APPEAL BEFORE THE LD.CIT(A), WHO AFTER CONSIDERING THE SUBMISSIONS, P ARTLY ALLOWED THE APPEAL OF THE ASSESSEE. WHILE ALLOWING THE APPEAL, THE LD.CIT(A) DELETED THE ADDITION MADE ON ACCOUNT OF ROYALTY PAYMENT AND BAD DEBT, BUT CONFIRMED THE ADDITION MADE U/S.40A(2)(B) OF THE AC T IN RESPECT OF THE REMUNERATION PAID TO THE DIRECTOR. 3. THE LD.COUNSEL FOR THE ASSESSEE SUBMITTED THAT T HE ASSESSING OFFICER AT PAGE NOS.5 & 6 VIDE PARA-5 OBSERVED THA T SHRI VIPUL J.RAY WAS PAID REMUNERATION OF RS.2 LACS PER MONTH, I.E. RS.24 LAKHS PER ANNUM AS AGAINST RS.80,000/- PER MONTH I.E. RS.9,60,000/- PER ANNUM IN THE PREVIOUS YEAR. THE LD.COUNSEL FOR THE ASSESSEE SUB MITTED THAT SHRI VIPUL J.RAY IS A QUALIFIED ENGINEER WITH B.E. MECHANICAL WHO HAS FURTHER DONE HIS M.S. AND M.B.A. FROM USA. HE HAS SERVED WITH A US-COMPANY ITA NO.2624 /AH D/2010 ECONIX HI-TECH COMPONENTS P.LTD.VS. DCIT ASST.YEAR 2005-06 - 3 - WHERE HE WAS GETTING RS.20 LACS PER ANNUM AS REMUN ERATION. HE SUBMITTED THAT THE AO HAS NOT BROUGHT ANYTHING ON R ECORD TO SUGGEST THAT AMOUNT IS UNREASONABLE AND EXCESSIVE WITH REGARD TO THE PREVALENT FAIR MARKET VALUE. HE FURTHER SUBMITTED THAT THE COMPAR ISON WITH THE EXECUTIVE DIRECTOR IS NOT A CORRECT APPROACH. HE S UBMITTED THAT THE FUNCTION AND THE DUTIES CARRIED OUT BY SHRI VIPUL J .RAY ARE TOTALLY DIFFERENT AND THE DIRECTOR SHRI VIPUL J.RAY HAS PER FORMED TECHNICAL DUTIES. HE FURTHER SUBMITTED THAT BOTH THE AUTHOR ITIES FAILED TO APPRECIATE THE FACT THAT BY MAKING PAYMENT OF RS.24 LACS TO TH E DIRECTOR, THERE IS NO EFFECT ON THE TAX AS COMPANY HAS PAID @ 30% AND TH E DIRECTOR HAS ALSO PAID @ 30%. HE SUBMITTED THAT THE INTENTION OF T HE LEGISLATOR TO INTRODUCE SECTION 40A(2)(B) OF THE ACT WAS TO ENSUR E THAT THE INCOME OF THE PAYER IS NOT REDUCED BY PAYING HIGHER SALARY OR SERVICES TO A RELATIVE AND THUS AVOID TAX. IN THE INSTANT CASE, THERE IS NOTHING ON RECORD TO SUGGEST THAT THE HIKE IN REMUNERATION IS MADE WITH AN INTENTION TO AVOID TAX LIABILITY. IN SUPPORT OF HIS CONTENTION, HE H AS RELIED ON VARIOUS DECISIONS AS FOLLOWS:- SL.NO(S) IN THE CASE OF. REPORTED/UNREPORTED IN 1. CIT PANAJI GOA VS. V.S. DEMPO & CO.(P) LTD. (2011) 196 TAXMAN 193 (BOM) 2. CIT VS. INDO SAUDI SERVICES (TRAVEL) (P) LTD. (2008) 219 CTR 562 (BOM) 3. HIVE COMMUNICATION PVT.LTD. VS. CIT DELHI HIGH C OURT IN ITA 306/2011 4. DCIT VS. M/S.RAVI CERAMICS ITA NO.2959/AHD/2009 ITAT AHMEDABAD 5. DCIT VS. SPARK HOTELS PVT.LTD. ITA NO.4631/DEL./ 2011 ITAT DELHI 6. ROYAL HYDRAULIC PVT.LTD. VS. ITO ITA NO.8814/MUM/2010 ITA NO.2624 /AH D/2010 ECONIX HI-TECH COMPONENTS P.LTD.VS. DCIT ASST.YEAR 2005-06 - 4 - ITAT MUMBAI 7. CIT VS. EDWARD KEVENTER (P.) LTD. (1978)115 ITR 149 (SC) 3.1. THE LD.COUNSEL FOR THE ASSESSEE FURTHER SUBMIT TED THAT IN THE SUBSEQUENT YEAR, THE LD.CIT(A) HAS ALLOWED INCREASE IN REMUNERATION OF RS.28,80,000/- AS AGAINST RS.24 LACS PAID IN THE AY 2006-07. 3.2. ON THE CONTRARY, LD.SR.DR STRONGLY SUPPORTED T HE ORDERS OF THE AUTHORITIES BELOW. HE SUBMITTED THAT THE ASSESSEE HAS NOT STATED THE REASONABLENESS OF THE HIKE IN REMUNERATION TO SUCH EXTENT. HE PLACED RELIANCE ON VARIOUS DECISIONS IN SUPPORT OF HIS CON TENTION THAT IT WAS FOR ASSESSEE TO DISCHARGE BURDEN AND SATISFY REVENUE TH AT EXPENDITURE INCURRED BY IT TO THE RELATED PARTIES WAS NOT EXCES SIVE OR UNREASONABLE. THE CASE-LAWS AS RELIED BY LD.SR.DR ARE AS UNDER:- SL.NO(S) IN THE CASE OF. REPORTED/UNREPORTED IN 1. CIT VS. NEPC INDIA LTD. (2008) 303 ITR 271 (MAD.) 2. V.S.T. MOTORS LTD. VS. CIT (2004) 135 TAXMAN 91 (MAD. HC) 3. DARSHAN SUMAN ZAVERI VS. ITO (2000) 73 ITD 318 (AHD.ITAT) 4. SHANTI LAL JAIN VS. CIT (2012) 21 TAXMANN.COM 261 (RAJ.HC) 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUSE D THE RECORDS AND GONE THROUGH THE ORDERS OF THE REVENUE AUTHORITIES. THE AO MADE DISALLOWANCE ON THE BASIS THAT QUALIFICATIONS OF SH RI VIPUL J.RAI AS NARRATED BY THE ASSESSEE DID EXIST IN THE IMMEDIATE PREVIOUS YEAR ALSO. IT DOES NOT JUSTIFY SUCH HUGE RAISE IN THE REMUNERATIO N. HOWEVER, CONSIDERING THE TWO FOLD INCREASE IN REMUNERATION O F EMPLOYEE EXECUTIVE DIRECTOR, SHRI D.C.TRIVEDI EXPENDITURE TO THE TUNE OF RS.19,20,000/- WAS ITA NO.2624 /AH D/2010 ECONIX HI-TECH COMPONENTS P.LTD.VS. DCIT ASST.YEAR 2005-06 - 5 - ALLOWED. THE LD.CIT(A) HAS TAKEN THIS TWO FOLD INC REASE OF THE OTHER EMPLOYEE, I.E. EXECUTIVE DIRECTOR AS THE INDICATOR OF THE FAIR MARKET VALUE FOR THE SERVICES RENDERED. WE HAVE GIVEN OUR T HOUGHTFUL CONSIDERATION TO THE FINDING OF BOTH THE AUTHORITIES BELOW AND A LSO THE DECISIONS RELIED UPON BY THE RESPECTIVE REPRESENTATIVES OF THE PARTI ES AT BAR. AS PER SECTION 40A(2)(B) OF THE ACT, THE AO IS EMPOWERED T O MAKE DISALLOWANCES IF IN HIS OPINION SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MAD E OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO HIM THEREFROM, SO MUCH OF THE EXP ENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE. FROM THE READING OF THE PROVISION, IT IS CLEAR THAT THE AO HAS TO FORM AN OPINION HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS AND SERVICES. IN THE PRESENT CASE, THE AO HAS SIMPLY DISALLOWED ON THE BASIS THAT THE HIKE IN REMUNERATION IS EXCESSIVE AND UNREASONABLE. THERE IS NO WHISPER IN THE ASSESSMENT ORDER AS TO HOW THIS IS EXCESSIVE OR UNREASONABLE H AVING REGARD TO THE FAIR MARKET VALUE OF THE SERVICES RENDERED. THE LD.CIT( A) HAS ALSO NOT GIVEN A PROPER FINDING WITH REGARD TO THE FAIR MARKET VAL UE OF THE SERVICES RENDERED BY THE EMPLOYEES AND HOW IT CAN BE TERMED AS EXCESSIVE OR UNREASONABLE. THE DECISIONS RELIED UPON BY THE S R.DR DO NOT HELP TO THE REVENUE AS THE RATIO LAID DOWN IN THE CASE OF C IT VS. NEPC INDIA LTD.(SUPRA). THE HONBLE HIGH COURT HAS HELD THAT WHAT SECTION 40A(2)(A) CONTEMPLATES IS THAT THERE SHOULD BE SOME MATERIAL AVAILABLE BEFORE THE AO FOR INVOKING SECTION 40A(2)(A) TO INI TIATE ACTION TO DISALLOW OR REFUSE TO DEDUCT THE EXCESSIVE OR UNREA SONABLE EXPENDITURE ITA NO.2624 /AH D/2010 ECONIX HI-TECH COMPONENTS P.LTD.VS. DCIT ASST.YEAR 2005-06 - 6 - MENTIONED THEREUNDER. BUT AT THE SAME TIME, BEFORE TAKING ANY FINAL DECISION BY INVOKING THE POWER UNDER SECTION 40A(2) (A), EITHER ALLOWING OR DISALLOWING SUCH EXPENDITURE INCURRED AS EXCESSI VE OR UNREASONABLE, SUCH DECISION OF THE ASSESSING OFFICER SHOULD BE BA SED ON REASONS WELL- FOUNDED, WHICH IS JUDICIOUSLY ACCEPTABLE AND IN WHI CH EVENT THE FINDING OR DECISION ARRIVED AT STATING THAT THE EXPENDITURE IS EXCESSIVE OR UNREASONABLE AND THE SAME CANNOT BE ALLOWED OR DEDU CTED. IN THE PRESENT CASE, THE FINDING GIVEN BY THE AO IS THAT I N EARLIER YEAR, THE ASSESSEE WAS PAID RS.9,60,000/- TO SHRI VIPUL J.RAY AND IN THE CURRENT YEAR, THE INCREASE IS MORE THAN TWO FOLD, BUT IN TH E CASE OF EXECUTIVE DIRECTOR SHRI D.C.TRIVEDI THE INCREASE IN THE REMUN ERATION IS MADE ONLY TWO FOLD. UNDISPUTEDLY, THE AO HAS NOT GIVEN ANY F INDING WITH REGARD TO DUTIES, FUNCTIONS AND THE RESPONSIBILITIES CARRIED OUT BY THE EXECUTIVE DIRECTOR OF THE ASSESSEE-COMPANY. EVEN BOTH THE AU THORITIES BELOW HAVE NOT GIVEN ANY FINDING WITH REGARD TO THE FAIR MARKE T VALUE OF THE SERVICES RENDERED BY SHRI VIPUL J.RAY. IN THE ABSENCE OF SU CH FINDING, WE ARE UNABLE TO ACCEPT THE CONTENTION OF LD.SR.DR THAT TH E HIKE IN REMUNERATION IS EXCESSIVE OR UNREASONABLE. UNDER THESE CIRCUMST ANCES, WE ARE OF THE VIEW THAT THE AUTHORITIES BELOW OUGHT TO HAVE GIVEN A CLEAR-CUT FINDING ABOUT THE FAIR MARKET VALUE OF THE SERVICES RENDERE D BY THE DIRECTOR PREVALENT DURING THE YEAR UNDER CONSIDERATION. DUR ING THE COURSE OF HEARING, LD.COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THE ORDERS OF THE LD.CIT(A) PASSED IN RESPECTIVE ASSESSMENT YEARS 200 7-08 & 2008-09, WHEREIN THE LD.CIT(A) HAD ACCEPTED THE REMUNERATION EVEN HIGHER THAN RS.24 LACS AS CLAIMED BY THE ASSESSEE-COMPANY. UND ER THESE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE, WE ARE OF THE CO NSIDERED VIEW THAT THE ITA NO.2624 /AH D/2010 ECONIX HI-TECH COMPONENTS P.LTD.VS. DCIT ASST.YEAR 2005-06 - 7 - AO WAS NOT JUSTIFIED IN DISALLOWING THE REMUNERATIO N AS CLAIMED BY THE DIRECTOR OF THE ASSESSEE, WITHOUT GIVING A CLEAR FI NDING IN RESPECT OF THE FAIR MARKET VALUE PREVALENT FOR THE SERVICES RENDER ED BY THE ASSESSEE. THEREFORE, WE DIRECT THE AO TO DELETE THE DISALLOWA NCE AS MADE U/S.40A(2)(B) OF THE ACT. HENCE, THIS GROUND OF T HE ASSESSEE IS ALLOWED. 5. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED. ORDER PRONOUNCED IN OPEN COURT ON THE DATE MENTIONE D HEREINABOVE SD/- SD/- (. ) (% &') !' # # ( A. MOHAN ALANKAMONY ) ( KUL BHARAT ) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD; DATED 14/ 08 /2013 8.., $.../ T.C. NAIR, SR. PS !5 2 /'9 :!9*' !5 2 /'9 :!9*' !5 2 /'9 :!9*' !5 2 /'9 :!9*'/ COPY OF THE ORDER FORWARDED TO : 1. +. / THE APPELLANT 2. /0+. / THE RESPONDENT. 3. ' %; / CONCERNED CIT 4. %;() / THE CIT(A)-I, BARODA 5. 9$&< /' , , / DR, ITAT, AHMEDABAD 6. <) =3 / GUARD FILE. !5% !5% !5% !5% / BY ORDER, 09' /' //TRUE COPY// > >> >/ // / , , , , ( DY./ASSTT.REGISTRAR) , , , , / ITAT, AHMEDABAD 1. DATE OF DICTATION .. 13.8.13 (DICTATION-PAD 22 P AGES ATTACHED AT THE END OF THIS FILE) 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 13.8.13 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S.. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 5. DATE ON WHICH FAIR ORDER PLACED BEFORE OTHER MEMBER 6. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S.14.8.13 7. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 14.8.13 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK ... 9. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 10. DATE OF DESPATCH OF THE ORDER