DCIT, Patiala V. M/s Bhawani Industries Ltd., Mandi Gobindgarh

ITA 285/CHANDI/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9941 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 2 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-05-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 10-03-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 17-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K MITTAL
• Assessee Lawyers: RAJIV DATTA
• Keywords: Onus to prove

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI H.L. KARWA, HONBLE VICE PRESIDENT AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA NO. 285/CHD/2015 ASSESSMENT YEAR : 2011-12 THE DCIT VS. M/S BHAWANI INDUSTRIES LTD. CENTRAL CIRCLE G.T. ROAD PATIALA VILLAGE AJNALI MANDI GOBINDGARH PAN NO. AABCB5105H (APPELLANT) (RESPONDENT) APPELLANT BY : SH. S.K. MITTAL RESPONDENT BY : SH. RAJIV DATTA DATE OF HEARING : 22/04/2016 DATE OF PRONOUNCEMENT : 25/05/2016 ORDER PER ANNAPURNA GUPTA, A.M. THIS APPEAL HAS BEEN FILED BY THE REVENUE AGAINST T HE ORDER OF LD. CIT(A)- 5, LUDHIANA, DATED 30.12.2014. THE REVENUE HAS RAIS ED THE FOLLOWING GROUNDS OF APPEAL:- 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DECISION OF LD. CIT (A) IN DELETING THE ADDITION OF RS.36 LAC ON AC COUNT OF DISALLOWANCE OF EXCESSIVE SALARY PAID TO DIRECTORS, IS CORRECT. 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DECISION OF LD. CIT (A) IN DELETING THE ADDITION OF RS. 12,20,000/- IS CORRECT, PARTICULAR/ KEEPING IN VIEW THAT THE DIRECTOR HAS SPENT RS. 10 LAC ON ITS INVESTMENT FROM HIS PERSONAL ACCOUNT. 2. AS REGARDS THE FIRST ISSUE INVOLVING THE ADDITIO N OF RS. 36,00,000/-, IT HAS BEEN NOTED BY THE LD. A.O. THAT THREE DIRECTORS NAM ELY SH. JAI PRAKASH GOEL, SH. SARVAN KUMAR GOEL AND SH. AMIT GOEL WERE PAID AS DI RECTORS SALARY AT THE RATE OF RS. 2,00,000/-PER MONTH. THE A.O. ASKED THE JUST IFICATION FOR THE INCREASE IN THE SALARY WHICH ACCORDING TO THE A.O. WAS EXPLAINED BY THE ASSESSEE AS DUE TO 2 INCREASE IN EFFORTS OF THE DIRECTORS, WHICH RESULTE D IN INCREASE IN TURNOVER. THE A.O. WAS NOT CONVINCED WITH THE EXPLANATION AND ACC ORDING TO HIM THE INCREASE IN TURNOVER WAS DUE TO INCREASE IN PRICES OF THE PRODUCTS. THE AO FURTHER NOTED THAT ANOTHER DIRECTOR WAS ALSO INTROD UCED AND THUS, ACCORDING TO THE A.O. THERE WAS NO JUSTIFICATION FOR SUCH QUANTU M OF REMUNERATION. ACCORDINGLY, THE A.O. RESTRICTED THE DIRECTORS SAL ARY OF THE ABOVE MENTIONED THREE DIRECTORS AT THE RATE OF RS. 1,00,000/- PER M ONTH PER DIRECTOR AND DISALLOWED AN AGGREGATE SUM OF RS. 36,00,000/- AS E XCESS AMOUNT PAID. 3. BEFORE THE LD. CIT(A), DETAILED SUBMISSIONS WERE MADE BY THE ASSESSEE REPRODUCED AT PARA 3-3.10 OF THE CIT(A) ORDER, JUST IFYING THE QUANTUM OF EXPENDITURE BY HIGHLIGHTING THE VAST EXPERIENCE AND TECHNICAL EXPERTISE OF THE DIRECTORS IN THE FIELD OF BUSINESS IN WHICH THE ASS ESSEE WAS ENGAGED AND ALSO THE INCREASE IN BUSINESS OF THE ASSESSEE COMPANY DUE TO THEIR CONCERTED EFFORTS. THE ASSESSEE ALSO POINTED OUT THAT THE AO HAD NOT SHOWN AS TO HOW THE EXPENDITURE WAS EXCESSIVE. THE LD. CIT(A) AFTER CONSIDERING THE ASSESSEES SUBMISSION DELETED THE DISALLOWANCE BY HOLDING THAT ASSESSING OFFICER HAD NOT ESTABLISHED AS TO HOW THE SALARY PAID TO THE DIRECTORS WAS EXCESSIVE SINCE NO COMPARISON WAS MADE WITH REFERENCE TO MARKET RATES. LD. CIT(A) DEL ETED THE DISALLOWANCE BY HOLDING AT PARA 4 OF HIS ORDER AS FOLLOWS: 4. I HAVE CONSIDERED THE FACTS OF THE CASE, THE BA SIS OF THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AND THE ARGUMENTS OF THE AR DURING THE ASSESSMENTS AS WELL AS APPELLATE PROCEEDINGS. IT IS QUITE APPARENT THAT THE ASSESSING OFFICER DOES NOT HAVE ANY LOGICAL BASIS T O MAKE PRESUMPTION REGARDING NON-CONTRIBUTION OF THE DIRECTORS TO THE INCREASE I N TURNOVER AND AT THE SAME TIME ATTRIBUTE THE SAME TO INCREASE IN RATES OF PRODUCTS . EVEN OTHERWISE THE ASSESSING OFFICER HAS TAKEN THE ROLE OF MANAGEMENT OF THE COM PANY IN DECIDING AS TO WHAT AMOUNT OF SALARY WOULD HAVE BEEN SUFFICIENT TO ACHIEVE THE OBJECTIVES OF THE COMPANY. IT HAS NOT BEEN POINTED OUT AS TO HOW THE SAID SALARY PAYMENTS COULD BE TERMED AS EXCESSIVE. NO COMPARISONS WITH R EFERENCE TO THE MARKET RATES HAVE BEEN BROUGHT ON RECORD TO JUSTIFY THE CO NCLUSION OF SALARIES BEING EXCESSIVE. ON THE OTHER HAND, AR HAS GIVEN DETAILED EXPERIENCE OF DIRECTORS IN MANAGING THE BUSINESS OF THE COMPANY AND THEIR PRIO R ACHIEVEMENTS. IT HAS ALSO BEEN POINTED OUT THAT ONE QUALIFIED TECHNICAL PERSO N NAMELY SH. PARDEEP JAIN HAD BEEN HIRED IN THE YEAR 2010 AT THE SALARY OF RS . 1,00,000/- PER MONTH TO FURTHER THE TECHNICAL CAPABILITIES OF THE ENTERPRISE. I AM IN AGREEMENT WITH THE ARGUMENT OF THE AR THAT THE ASSESSING OFFICER HAD NOT GIVEN ANY FINDING AS TO THE FAIR MARKET PRICE OF THE SERVICES RENDERED BY THE DIRECTORS AND HOW THE SAME COULD BE TERMED AS EXCESSIVE. THE AR HAS PLACED RELIANCE ON THE DECISION ON THE HONBLE 3 APEX COURT IN THE CASE OF UPPAR INDIA STEEL MANUFAC TURING AND ENGINEERING CO. (P) LTD. 117 ITR 569 (S.C). IT IS ALSO TO BE SEEN T HAT THE EXCESSIVE / UNREASONABLENESS HAS TO BE SEEN FROM THE POINT OF V IEW OF THE BUSINESSMAN AND MERE ARITHMETICAL COMPARISONS OF TURNOVER AND SALAR Y EXPENSES CANNOT BE BASIS OF ALLOWABLE EXPENSE IN THIS REGARD. THE ENTERPRISE COULD VERY WELL HIRE PERSONS WITH A VIEW TO EXPAND THE BUSINESS FOR WHICH HUMAN RESOURCE IS THE KEY ELEMENT. IN VIEW OF THE ABOVE DETAILED FACTS AND CIRCUMSTANC ES OF THE CASE, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS DIREC TED TO BE DELETED. 4. AGGRIEVED BY THE SAME THE REVENUE HAS RAISED GRO UND NO. 1 BEFORE US TO THAT EFFECT. 5. BEFORE US LD. DR RELIED UPON THE ORDER OF THE AO WHILE LD. AR REITERATED THE ARGUMENT MADE BEFORE LD. CIT(A) AND FURTHER REL IED UPON THE ORDER OF THE LD. CIT(A). 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD AND AFTER CONSIDERING THE ENTIRE MATERIAL BEFORE US , WE ARE OF THE CONSIDERED VIEW THAT THIS GROUND OF APPEAL RAISED BY THE REVEN UE HAS TO BE DISMISSED. THERE WAS ABSOLUTELY NO VALID BASIS WITH THE A.O. TO HOLD THAT THE DIRECTORS SALARY WAS EXCESSIVE. THERE IS NO EVIDENCE BROUGHT ON RECORD B Y THE A.O. TO HOLD IT AS EXCESSIVE. IT IS NOT FOR THE A.O. TO DICTATE AN ASS ESSEE AS TO HOW THE BUSINESS DECISIONS HAVE TO BE TAKEN. WHEN DIRECTORS SALARY WAS HELD TO BE EXCESSIVE BY THE A.O., BURDEN TO PROVE THAT IT WAS EXCESSIVE WAS ON THE SHOULDERS OF THE A.O. WHICH IN OUR CONSIDERED OPINION HAS NOT BEEN DISCHA RGED WITH THE HELP OF ANY EVIDENCE. ON THE OTHER HAND, WE FIND THAT THE ASSES SEE HAS JUSTIFIED THE QUANTUM OF THE EXPENDITURE BY GIVING DETAILS OF THE VAST EXPERIENCE AND TECHNICAL EXPERTISE OF THE DIRECTORS AS ALSO THEIR CONTRIBUTION TO INCREASE IN THE BUSINESS OF THE ASSESSEE. 7. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) DELETING THE DISALLOWANCE OF RS.36,00,000/- AND WE THUS UPHOLD T HE ORDER OF CIT(A) QUA GROUND OF APPEAL NO. 1. 8. REGARDING THE SECOND GROUND OF APPEAL RAISED BY REVENUE AMOUNTING TO RS. 12,20,000/-ON ACCOUNT OF EXPENDITURE TOWARDS RE NT, THE A.O. NOTED THAT THIS 4 AMOUNT WAS SHOWN AS RENT OF HOUSE NO. 5, SECOND FLO OR, SECTOR-9, CHANDIGARH WHICH WAS USED BY SH. JAI PRAKASH GOEL, ONE OF THE DIRECTORS OF THE ASSESSEE COMPANY, WHICH WAS, DURING THE COURSE OF ASSESSMENT PROCEEDINGS, EXPLAINED BY THE ASSESSEE AS THE RENT PAID FOR THE HOUSE TAKE N AS RESIDENCE OF THE MANAGING DIRECTOR OF THE ASSESSEE COMPANY WHICH WA S USED FOR THE PURPOSE OF BUSINESS. THE ASSESSING OFFICER FOUND THAT THE DIRE CTOR HAD SPENT AN AMOUNT OF RS. 10 LACS FOR RENOVATING THE HOUSE AND THEREFORE DISALLOWED THE RENT AS NOT RELATING TO THE BUSINESS OF THE ASSESSEE. LD. CIT(A ) HOWEVER DELETED THE DISALLOWANCE BY HOLDING AT PARA 6.6 OF HIS ORDER AS UNDER:- 6.6 I HAVE CONSIDERED THE FACTS OF THE CASE, THE B ASIS OF DISALLOWANCE MADE BY THE ASSESSING OFFICER, ARGUMENTS OF AR DURING AS SESSMENT AS WELL AS APPELLATE PROCEEDINGS. IT IS SEEN THAT THE HIRING OF THE HOUS E FOR THE MANAGING DIRECTOR AT CHANDIGARH HAS BEEN APPROVED BY A SPECIAL RESOLUTIO N OF THE BOARD OF DIRECTORS AND THE SAID HIRE WAS APPROVED TO ENABLE THE MANAGI NG DIRECTOR TO SPEND MORE TIME AT CHANDIGARH TO CO-ORDINATE RELATIONSHIPS WIT H VARIOUS BUSINESS ASSOCIATES WHO WOULD MOSTLY TRAVEL TO CHANDIGARH FROM VARIOUS PARTS OF COUNTRY. THE IDEA WAS TO MAKE IT MORE CONVENIENT FOR THEM. THE FACT T HAT SH. JAI PRAKASH GOEL SPENT RS. 10,00,000/- ON RENOVATION OF THE HOUSE FR OM HIS OWN FUNDS CANNOT LEAD TO CONCLUSION THAT-THE HIRING DID NOT SERVE BUSINES S PURPOSE. IT IS ALSO POSSIBLE THAT EVEN THE RENOVATION EXPENSES COULD HAVE BEEN DEBITE D IN THE BOOKS OF ACCOUNT OF THE ASSESSEE COMPANY AS A BUSINESS EXPENSE BUT T HE SAME HAS NOT BEEN DONE WHICH COULD BE THE UNDERSTANDING BETWEEN THE COMPAN Y AND THE DIRECTOR HIMSELF. IT IS ALSO TO BE APPRECIATED THE SAID PROV ISION OF RENT FREE ACCOMMODATION HAS BEEN TAKEN AS PART OF SALARY COMP UTATION BY THE DIRECTOR IN HIS INDIVIDUAL RETURN. IN VIEW OF THE ABOVE DETAILE D FACTS AND CIRCUMSTANCES OF THE CASE, I AM OF THE VIEW THAT THE CLAIM OF RENT FREE ACCOMMODATION COULD NOT BE TERMED AS NON-BUSINESS EXPENSE AND HENCE IS DIRECTE D TO BE DELETED. 9. BEFORE US LD. DR RELIED UPON THE ORDER OF THE AO WHILE LD. AR REITERATED THE ARGUMENTS MADE BEFORE THE LD. CIT(A) AND FURTHE R RELIED UPON THE ORDER OF THE LD. CIT(A). 10. BOTH SIDES WERE HEARD. LD. DR COULD NOT POINT O UT AS TO HOW THE DECISION RENDERED BY LD. CIT(A) WAS NOT CORRECT. IN THE PRE SENT CASE, WE FIND THAT THE HOUSE WAS TAKEN ON RENT WITH THE APPROVAL, BY A RES OLUTION, BY THE BOARD OF DIRECTORS AND WAS GIVEN TO THE DIRECTOR AS PERQUISI TE WHICH WAS OFFERED TO TAX BY THE DIRECTOR CONCERNED IN HIS INDIVIDUAL RETURN. SU CH RETURN OF INCOME SO FILED BY THE DIRECTOR WAS ACCEPTED BY THE REVENUE WITH NO OB SERVATION. THIS WAS A BUSINESS DECISION TAKEN BY THE ASSESSEE COMPANY TO TAKE THE HOUSE ON RENT AND 5 GIVE IT TO THE DIRECTOR FOR HIS RESIDENCE. EXPENSE IN QUESTION WAS RIGHTLY HELD AS ALLOWABLE DEDUCTION BY LD. CIT(A). WE DO FIND ANY I NFIRMITY IN THE ORDER OF LD. CIT(A) AND WE UPHOLD THE ORDER OF CIT(A). ACCORDING LY, GROUND NO. 2 TOO IS DISMISSED. 11. IN THE RESULT APPEAL OF THE REVENUE IS DISMISSE D. ORDER PRONOUNCED IN THE OPEN COURT ON 25/05/2016. SD/- SD/- (H.L. KARWA) (ANNAPURNA GUPTA) VICE PRESIDENT ACCOUNTANT MEMBER DATED : 25/05/2016 AG COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT, TH E CIT(A), THE DR