LUBE OIL DISTRIBUTORS, MUMBAI V. DCIT 20(2), MUMBAI

ITA 2875/MUM/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 7785 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-03-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 22-02-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 13-05-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH I,MUM BAI BEFORE SHRI D.KARUNAKARA RAO, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA NO.2875/MUM/2015 (ASSESSMENT YEAR- 2007-08) M/S LUBE OIL DISTRIBUTORS 25, JAKERIA BUNDER ROAD, NEXT TO RAJDOOT HOTEL, COTTON GREEN, MUMBAI-400033 PAN: AABFL7691M VS. DCIT -20(2) MUMBAI. (APPELLANT) (RESPONDENT) ASSESSEE BY : NONE REVENUE BY : SHRI SAURABH KUMAR RAI (DR) DATE OF HEARING : 22.02.2017 DATE OF PRONOUNCEMENT : 17.03.2017 ORDER UNDER SECTION 254(1) OF INCOME TAX ACT PER PAWAN SINGH, JUDICIAL MEMBER: 1. THIS APPEAL UNDER SECTION 253 OF THE INCOME-TAX ACT (THE ACT) IS DIRECTED BY ASSESSEE AGAINST THE ORDER OF LD. COMMISSIONER OF I NCOME-TAX (APPEALS) [FOR SHORT THE CIT(A)] 32, MUMBAI DATED 18.03.2015 FOR ASSESSMENT YEAR (AY) 2007-08. THE ASSESSEE HAS RAISED ONLY ONE EFFECTIVE GROUND OF APPEAL THAT LD. CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 24,00,000/- OUT OF SALARY OF RS. 35,80,000/- 40A (2)(B) OF THE ACT. REST OF THE GROUNDS OF APPEAL EITHER ARGUMENTATIVE OR CONSEQUENTIAL IN NATURE. 2. BRIEF FACTS OF THE CASE ARE THAT ASSESSEE IS A PART NERSHIP FIRM DERIVING ITS INCOME FROM BUSINESS OF DISTRIBUTION OF PRODUCTS OF INDIA OIL CORPORATION (IOC). THE ASSESSEE FILED RETURN OF INCOME FOR RELEVANT AY ON 31.10.2007 DECLARING INCOME OF RS.21,52,960/-. THE ASSESSMENT WAS COMPLETED UND ER SECTION 143(3) ON ITA NO. 2875/MUM/2015 M/S LUBE OIL DISTRIBUTORS 2 25.11.2009. THE ASSESSING OFFICER (AO) WHILE PASSIN G ASSESSMENT ORDER BESIDES THE OTHER ADDITION AND DISALLOWANCE, DISALLOWED RS. 35,80,400/- U/S 40A(2)(B) OF THE ACT. THE AO DISALLOWED THE AMOUNT HOLDING THAT THE SALARY PAID TO SONS AND DAUGHTER-IN-LAWS OF ONE OF THE PARTNER HAS BEEN PAI D OTHER THAN THE BUSINESS CONSIDERATION. ON APPEAL BEFORE THE LD. CIT(A), THE DISALLOWANCE WAS SUSTAINED VIDE ORDER DATED 29.12.2010. AGGRIEVED BY THE ORDER OF LD. CIT(A), THE ASSESSEE APPROACHED THE TRIBUNAL IN SECOND APPEAL. THE TRIBU NAL VIDE ORDER DATED 22.06.2011 IN ITA NO.1179/M/2011 RESTORED BACK THE ISSUE TO THE FILE OF LD. CIT(A) TO CONSIDER THE MATERIAL AND PASS ORDER AFRE SH AFTER GIVING OPPORTUNITY TO THE ASSESSEE. THE LD CIT(A) AFTER GIVING OPPORTUNIT Y TO THE ASSESSEE PASSED THE ORDER DATED 18/03/2015 AND SUSTAINED THE DISALLOWA NCE TO RS. 35,80,000/-. HENCE, FURTHER AGGRIEVED BY THE ORDER OF LD CIT(A) THE PRE SENT APPEAL IS FILED BEFORE TRIBUNAL. 3. NONE APPEARED BEFORE US WHEN CASE WAS CALLED FOR H EARING DESPITE PASSING OVER AND WAITING FOR SUFFICIENT TIME. THE NOTICE OF HEAR ING FOR 22.02.2017 WAS DULY SERVED THROUGH REGISTERED AD, AS AD CARD IS AVAILAB LE ON RECORD. AS NONE APPEARED ON BEHALF OF ASSESSEE, WE LEFT NO OPTION E XCEPT TO PROCEED WITH THE CASE TO HEARING THE SUBMISSION OF LD. DEPARTMENTAL REPRE SENTATIVE (DR) FOR THE REVENUE AND TO DECIDE THE APPEAL ON THE BASIS OF MA TERIAL AVAILABLE ON RECORD . 4. WE HAVE HEARD THE LD. DR FOR THE REVENUE AND PERUSE D THE MATERIAL AVAILABLE ON RECORD. THE LD. DR FOR THE REVENUE ARGUED THAT ASSE SSEE HAS MADE THE EXCESSIVE PAYMENT TO THE SONS AND DAUGHTER-IN-LAW BY SHOWING THEM AS AN EMPLOYEE IN THE FIRM. THE SAID PERSON ARE IN FACT SONS AND DAUGHTER IN LAW OF ONE OF THE PARTNER OF THE ASSESSEE. THE ASSESSEE HAS NOT SUBSTANTIATED IT S CLAIM BY FILING CORROBORATIVE EVIDENCE IN SUPPORT OF THEIR CLAIM AND HENCE THE OR DER PASSED BY LD CIT(A) IS REASONED ONE AND DOES NOT REQUIRE ANY INTERFERENCE BY THE TRIBUNAL. 5. WE HAVE CONSIDERED THE SUBMISSION OF LD. DR FOR THE REVENUE.THE AO WHILE FRAMING ASSESSMENT ORDER NOTICED THAT ASSESSEE HAD DEBITED THE EXPENDITURE IN THE NAME OF MISS. ARCHNA ADANI OF RS. 1,85,000/-, MISS. MANALI ADANI OF RS. 19,50,000/-, PRAG ADANI OF RS. 19,50,000/- AND FOR RAJIV ADANI OF RS. ITA NO. 2875/MUM/2015 M/S LUBE OIL DISTRIBUTORS 3 19,50,000/-. MISS. ARCHNA ADANI WAS SHOWN AS RELATI ONSHIP MANAGER, MISS. MANALI ADANI IS ADMINISTRATIVE WORK IN THE OFFICE, MR. PARAG ADANI IS SHOWN AS SALES AND CONTROL AT HEAD OFFICE AND RAJIV ADANI IS SALES MANAGER. THE AO FURTHER NOTICED THAT ALL FOUR PERSONS WERE ACTUALLY RELATIVE OF PANNA P. ADANI, ONE OF THE PARTNER HAVING 98% SHARE IN THE PARTNERSHIP. THE AO ASKED THE ASSESSEE TO SUBSTANTIATE THE CLAIM OF EXPENDITURE AND TO FILE T HE EVIDENCE IN SUPPORT OF THE CLAIM. AFTER CONSIDERING THE REPLY OF THE ASSESSEE, THE AO CONCLUDED THAT ASSESSEE HAS NOT FURNISHED ANY EVIDENCE OF ACTUAL WORK DONE BY THESE FOUR PERSONS AND DISALLOWED THE SAME. ON APPEAL BEFORE CIT(A) THE DI SALLOWANCE WAS SUSTAINED BY LD. CIT(A). ON FURTHER APPEAL BEFORE THE TRIBUNAL, IT WAS ARGUED THAT THE SALES INCENTIVE PAID TO RAJIV ADANI AND PARAG ADANI WAS W ITH REGARD TO THEIR PERFORMANCE IN THE INCREASED SALE BY 100% COMPARATI VE TO EARLIER AY. IT WAS FURTHER ARGUED THAT SALARY OF PARAG ADANI AND RAJIV ADANI, THERE WAS INCREASED IN THEIR SALARY FROM RS. 2,02,000/- TO RS. 6,00,000/- IN AY 2006-07. THE INCREASE WAS DUE TO THEIR PERFORMANCE IN SALES. WHILE CONSID ERING THE CONTENTION OF ASSESSEE TRIBUNAL RESTORED THIS GROUND TO THE FILE OF LD. CIT(A) TO DECIDE THE MATTER AFRESH AFTER GIVING PROPER OPPORTUNITY OF HE ARING TO THE ASSESSEE. THE LD. CIT(A) IN THE REMAND PROCEEDING AFTER CONSIDERING T HE SUBMISSION, PASSED THE FOLLOWING ORDER: 5.4 I HAVE CAREFULLY CONSIDERED THE FACTS AND CIRC UMSTANCES OF THE CASE. THE APPELLANT HAS FURNISHED THE WORK DONE BY MR PARAG A ND MR RAJIV ADANI. HOWEVER, I FIND IT ABSURD THAT THE SALARY OF MR RAJ IV ADANI WAS ONLY RS.96,000/- IN AY 2005-06, RS.3,00,000/- IN AY 2006 -07 AND RS. 1 9,50,000/- IN THE CURRENT YEAR. SIMILARLY, MR PARAG ADANI'S SALARY WAS RS.2,02,000/- IN AY 2005-06, RS.6,00,000/- IN AY 20 06-07 AND RS.19,50,000/- IN THE CURRENT YEAR. THE APPELLANT H AS STATED THAT THE REASON FOR INCREASE IN SALARY IS THE INCREASE IN SALES. HOWEVE R, I FIND THAT THOUGH THE SALES HAVE GROWN BY A HUGE MARGIN, THE GROSS PROFIT AS A % OF SALES HAS COME DOWN FROM 13% TO 7%. THUS, IT APPEARS THAT THE APPE LLANT FIRM HAS CLAIMED EXCESS PAYMENT TO RELATIVES MERELY TO LOWER THE TAX ABLE PROFIT OF THE FIRM. 5.5. IT IS CLEAR THAT MS. ARCHANA ADANI IS A RELATI ONSHIP MANAGER WHO HANDLES PUBLIC RELATIONS AND HER INCREASE IN SALARY TO RS.1 .85 LAKHS IS ONLY MARGINAL AS COMPARED WITH THE PRECEDING YEAR. MRS. MANALI ADANI IS AN ADMINISTRATIVE MANAGER WHOSE SALARY WAS RS.1.25) LAKHS WHICH IS CO MPARABLE WITH MARKET RATES. HENCE, NO DISALLOWANCE U/S 40(A)(2)(B) OF TH E ACT IS WARRANTED IN THE CASE OF MS. ARCHANA ADANI AND MRS. MANALI ADANI. AS REGARDS, PAYMENT TO MR. RAJIV ADANI AND MR. PARAG ADANI, THE APPELLANT HAS PROVED THE EXPERTISE ITA NO. 2875/MUM/2015 M/S LUBE OIL DISTRIBUTORS 4 OF THE SAID PERSONS WHICH IS EVIDENCED FROM THE COR RESPONDENCE WITH IOC. THE APPELLANT HAS ALSO SHOWN THAT THE SAID SALARY W AS OFFERED TO TAX IN THE HANDS OF THE RECIPIENTS. 5.6. I AM OF THE VIEW THAT THOUGH THE SALARY PAID I S IN LINE WITH THE EXPERTISE PROVIDED BY MR. RAJIV ADANI AND MR. PARAG ADANI, TH E INCENTIVE PAID IS FAR BEYOND THE MARKET RATES. IT CAN ALSO BE ASCERTAINED THAT GROSS PROFIT PERCENTAGES HAVE FALLEN DRASTICALLY DUE TO SUCH HUG E INCENTIVES PAID. IN VIEW OF THE TOTALITY OF FACTS OF THE CASE, IN THE INTERE ST OF JUSTICE, I RESTRICT THE DISALLOWANCE U/S 40(A)(2)(B) OF THE ACT TO 100% OF THE INCENTIVE PAID TO MR. RAJIV ADANI AND MR. PARAG ADANI AMOUNTING TO RS.24, 00,00/-. HENCE, THE APPELLANT IS ENTITLED TO RELIEF OF RS. 11,80,000/- 6. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. 6. WE HAVE SEEN THAT THE LD. CIT(A) AFTER CONSIDERING THE SALES FOR AY 2005-06 TO 2007-08 AND CONSIDERING THE GROSS PROFIT (G.P.) RAT IO AND GRADUALLY INCREASED IN THE SALARY OF RAJIV ADANI AND PARAG ADANI CONCLUDED THAT THE SALARY PAID TO PARAG ADANI AND RAJIV ADANI ARE IN LINES WITH EXPERTISE PROVIDED BY THEM, HOWEVER, THE INCENTIVE PAID IS FAR BEYOND THE MARKET RATES AND R ESTRICTED THE DISALLOWANCE PAID TO RAJIV ADANI AND PARAG ADANI TO RS. 24,00,000/-. 7. THE HONBLE BOMBAY HIGH COURT IN CIT VS SHATRUNJAY DIOMONDS 261 ITR 258 HELD THAT THE PORPOSE OF LEGISLATURE BEHIND ENACTIN G SECTION 40A (2)(B) WAS TO PROVIDE FOR SHIFTING OF BURDEN IN CASE WHERE THE TRANSACTION IS NOT AT ARMS LENGTH. THOUGH THE INITIAL ONUS IS ON THE ASSESSEE THAT THE PAYMENTS OF EXPANSES MADE TO RELATED PARTY IS NOT EXCESSIVE. HOWEVER, IN CASE THE AO IS NOT SATISFIED WITH THE EXPLANATION HE MUST BRING COGENT EVIDENCE ON RECORD TO SHOW THAT THE PAYMENTS MADE TO THE RELATED PARTIES IS EXCESSIVE O R NOT BASED ON REGION CUM INDUSTRY FORMULE. THE AO HAS NOT BROUGHT ON RECORD ANY MATERIAL THAT THE PAYMENT MADE TO RELATED PARTY IS NOT AT ARMS LENGT H. THUS, WE RESTORE THE ISSUE TO THE FILE OF AO TO EXAMINE THE ISSUE AFRESH IN ACCOR DANCE WITH THE LAW LAID DOWN BY JURISDICTIONAL HIGH COURT IN CIT VS SHATRUNJAY D IAMONDS (SUPRA). THE ASSESSEE IS ALSO DIRECTED TO PROVIDE ALL NECESSARY EVIDENCES AND INFORMATION TO THE AO. NEEDLESS TO SAY THAT BEFORE PASSING THE ORDER T HE AO SHALL PROVIDE OPPORTUNITY TO THE ASSESSEE. IN THE RESULT THE APPE AL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. ITA NO. 2875/MUM/2015 M/S LUBE OIL DISTRIBUTORS 5 . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 1 7 TH MARCH, 2017. SD/- SD/- (D.KARUNAKARA RAO) (PAWAN SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI; DATED 17/03/2017 S.K.PS COPY OF THE ORDER FORWARDED TO : BY ORDER, (ASSTT.REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY/