The DCIT, Circle-1(1)(2), Ahmedabad V. Cytespace Research Pvt. Ltd., Ahmedabad

ITA 3133/AHD/2016

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 6879 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 8 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-07-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2013-2014
• Appeal Filed On: 29-11-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Salary income; Commercial expediency; TDS; Set aside
• Section: 143(3); 37(1); 143(1); 205; 131; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER & MS. MADHUMITA ROY, JUDICIAL MEMBER I.T.A. NO.3133/AHD/2016 (ASSESSMENT YEAR :2013-14) DCIT, CIRCLE 1(1)(2), AHMEDABAD. VS. CYTESPACE RESEARCH PVT. LTD., 105, SHAGUN COMPLEX, B93, SWASTIK SOCIETY, NAVRANGPURA, AHMEDABAD. [PAN NO. AAECC 3348 J] ( APPELLANT ) .. ( RESPONDENT ) APPELLANT BY : SHRI VINOD TANWANI, SR. D.R. RESPONDENT BY : SHRI DHINAL SHAH, A.R. DATE OF HEARING 01.07.2019 DATE OF PRONOUNCEMENT 30.07.2019 O R D E R PER MS. MADHUMITA ROY -JM: THE INSTANT APPEAL FILED BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 30.09.2016 PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS)-1, AHMEDABAD UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (HEREINA FTER REFERRED AS TO THE ACT) ARISING OUT OF THE ORDER DATED 29.01.2016 PASSED BY THE DCI T, CIRCLE 1(1)(2), AHMEDABAD FOR THE ASSESSMENT YEAR 2013-14. 2. THE ASSESSEE ENGAGED IN UNDERTAKING CLINICAL RES EARCH AND PROVIDING ON-SITE SOLUTIONS, PERFORMANCE METRICS UPDATES, FEASIBILITY STUDIES, SITE SET UP ETC TO BIOPHARMACEUTICAL SPONSORS AND CONTRACT RESEARCH OR GANIZATIONS (CRO), FILED ITS RETURN OF INCOME ON 27.09.2013, DECLARING LOSS AT RS.4,51, 55,310/- THROUGH ELECTRONIC MEDIA WHICH WAS PROCESSED UNDER SECTION 143(1) OF THE ACT . UPON SCRUTINY NOTICE UNDER SECTION 143(2) OF THE ACT DATED 02.09.2014 WAS SERVED UPON THE ASSESSEE. THE ASSESSMENT WAS - 2 - ITA NOS.3133/AHD/2016 DCIT VS. CYTESPACE RESEARCH PVT. LTD. ASST.YEAR 2013-14 FINALIZED ON 29.01.2016 BY MAKING ADDITION/DISALLOW ANCES OF RS.3,41,72,205/- ON ACCOUNT OF EMPLOYEES BENEFIT EXPENSE WHICH WAS, IN TURN, DELETED BY THE LEARNED CIT(A). HENCE, THE INSTANT APPEAL BEFORE US. 3. THE BRIEF FACTS LEADING TO THE INSTANT CASE IS T HIS THAT UPON VERIFICATION OF PROFIT AND LOSS ACCOUNT DURING THE COURSE OF ASSESSMENT PROCEE DING, IT WAS FOUND THAT THE ASSESSEE HAS DEBITED EMPLOYEES BENEFIT AT RS.6,25,64,280/- FOR A.Y. 2013-14 AS AGAINST SUCH EXPENDITURE OF LAST YEAR SHOWN AT RS.2,83,92,075/-. SINCE THERE WAS A SHARP INCREASE IN SALARY EXPENSES AS COMPARED TO THE TURNOVER JUSTIFI CATION WAS ASKED FOR AS TO THE CLAIM OF SUCH EXPENDITURE AS EMPLOYEES BENEFIT WITH SUPPORT ING EVIDENCES. THE JUSTIFICATION RENDERED BY THE ASSESSEE WAS NOT FOUND FIT. ACCORDI NG TO THE LEARNED AO, THE ASSESSEE HAS DEBITED SALARY EXPENDITURE OF RS.6,25,64,280/- WHICH IS MORE THAN THRICE AS COMPARED TO IMMEDIATELY PRECEDING YEAR. IT WAS FURTHER NOTIC ED FROM THE BOARDS RESOLUTION FOR REMUNERATION OF DIRECTORS, THAT ONE SHRI BHAVESH G. ACHARYA, AN EMPLOYEE WAS PAID EXORBITANT SALARY WHO PURCHASED 400 SHARES, THE FAC E VALUE OF WHICH WAS OF RS.10, AT A PREMIUM OF RS.9,590/-. TOTAL INVESTMENT MADE BY HIM WAS TO THE TUNE OF RS.38,40,000/-. IT WAS FOUND THAT HE WAS TAKEN UP THE JOB OF THE AS SESSEE COMPANY AT A LOWER SALARY THAN HE WAS DRAWING PRESENTLY ON THE ASSURANCE THAT HE W ILL BE BENEFITING BY INVESTING IN THE SHARES OF THE ASSESSEE COMPANY. IT IS RELEVANT TO M ENTION THAT THE SAID SHARES WERE LATER ON SOLD TO THE DIRECTORS/PROMOTERS OF THE ASSESSEE COM PANY AT COLOSSAL LOSS. HENCE, THE ASSESSEE HAS COMPENSATED SHRI ACHARYA BY INCREASING HIS SALARY TO MAKEUP THE LOSS INCURRED AS OPINED BY THE LEARNED AO. FURTHER THAT THERE WAS NO SUBSTANTIAL INCREASE IN NUMBER OF EMPLOYEES AS COMPARED TO LAST YEAR. APART FROM THAT, IT WAS OBSERVED THAT ASSESSEE HAS INTRODUCED CAPITAL BY ISSUING SHARE WI TH PREMIUM MAINLY FROM THE DIRECTORS AND EMPLOYEES. MAJORITY OF SUCH CAPITAL WITH A PREM IUM HAS BEEN RECEIVED MAINLY FROM SURESH RAMU, HIMANSHU SHAH, LALIT PAI AND BHAVESH A CHARYA. STATEMENT OF SHRI ACHARYA WAS ALSO RECORDED UNDER SECTION 131 OF THE ACT ON 28.12.2015 TO VERIFY THE GENUINENESS OF SUCH INTRODUCTION OF CAPITAL. HOWEVE R, THE EXPLANATION RENDERED BY THE - 3 - ITA NOS.3133/AHD/2016 DCIT VS. CYTESPACE RESEARCH PVT. LTD. ASST.YEAR 2013-14 ASSESSEE BEFORE THE ASSESSING OFFICER WAS NOT FOUND ACCEPTABLE AND FINALLY ADDITION WAS MADE. IN APPEAL, AS WE FIND FROM THE RECORDS THAT T HE ASSESSEE MADE THE FOLLOWING SUBMISSIONS BEFORE THE APPELLATE AUTHORITY: 2.2. THE SUBMISSION FILED BY THE APPELLANT BEF ORE CIT (APPEALS) IS AS UNDER:- 1.1 DURING THE YEAR UNDER CONSIDERATION, THE APPEL LANT HAD INCURRED EMPLOYEE BENEFIT EXPENSES AMOUNTING TO RS.6,25,64,280/- AS A GAINST EXPENSES AMOUNTING TO RS.2,83,92,075 INCURRED IN PREVIOUS YEAR. 1.2 HOWEVER, WHILE PASSING THE ASSESSMENT ORDER, T HE LEARNED AO DISALLOWED EMPLOYEE BENEFIT EXPENSES AMOUNTING TO RS. 3,41,72, 205 (RS. 6,25,64,280 MINUS RS. 2,83,92,075) BEING EXPENSES ADDITIONALLY INCURRED I N THE CAPTIONED YEAR, AY 2013-14 AS COMPARED TO EMPLOYEE BENEFIT EXPENSES INCURRED IN T HE PREVIOUS YEAR, I.E. AY 2012-13. 1.3 IN CONNECTION WITH THE ABOVE, THE APPELLANT SU BMITS THAT IT WAS INCORPORATED ONLY ON 11 MARCH 2011 AND HENCE, FY 2011-12 WAS THE FIRS T YEAR OF OPERATION. COPY OF FINANCIAL STATEMENTS FOR FY 2012-13 IS ATTACHED AS ANNEXURE 1. ACCORDINGLY, BEING THE INITIAL YEAR, MOST OF ITS EMPLOYEES WERE EMPLOYED F OR ONLY PART OF THE YEAR AND THEREFORE, EMPLOYEE COSTS INCURRED IN THE FIRST YEAR OF OPERAT IONS WOULD ALWAYS BE LOWER THAN EMPLOYEE COSTS INCURRED IN THE SUBSEQUENT YEARS WHE REIN THEY WERE EMPLOYED FOR THE FULL YEAR. THUS, EMPLOYEE COSTS OF RS. 2,83,92,075 INCUR RED IN PREVIOUS YEAR, I.E. AY 2012-13 INCLUDED SALARY COSTS OF EMPLOYEES WHICH WERE EMPLO YED FOR ONLY PART OF A YEAR AND HENCE, THEIR ONLY PART SALARY WAS INCLUDED IN THE S ALARY EXPENSES OF AY 2012-13. A COPY OF SALARY REGISTER SHOWING THE ACTUAL SALARY PAID I N AY 2012-13 IS ATTACHED AS ANNEXURE 2. IN CONNECTION WITH THE SAME, A FEW SAMPLE COPIES OF THE EMPLOYMENT CONTRACTS OF EMPLOYEES ARE ATTACHED AS ANNEXURE 3 WHICH ALSO SUBSTANTIATES THAT THEY WERE THERE EMPLOYED ONLY FOR A PART OF THE YEAR, IN FY 2011-12 . 1.4 SUBSEQUENTLY, IN THE CAPTIONED YEAR, ALL TH ESE EMPLOYEES WHICH WERE EMPLOYED FOR PART OF THE PREVIOUS YEAR, WERE EMPLOYED FOR FULL P ART OF THE CAPTIONED YEAR AND HENCE THEIR TOTAL SALARY EXPENSES FOR THE ENTIRE YEAR WAS INCLUDED IN THE ONLY IN CAPTIONED YEAR, I.E. FY 2012-13. THEREFORE, UPON A COMPARISON OF T HE ANNUALIZED SALARY FOR SAME EMPLOYEES WHICH WERE EMPLOYED IN EARLIER YEAR, I.E. FY 2011-12, THE SAME WOULD AMOUNT TO RS.5,90,34,991 AGAINST WHICH ACTUAL SALARY PAID TO THEM IN FY 2012-13 WAS RS.3,62,15,515. HENCE, IN RESPECT OF SAME EMPLOYEES WHICH WERE EMPLOYED IN BOTH FY 2011-12 AS WELL AS FY 2012-13, THERE WAS DECREASE I N THEIR SALARY EXPENSES BY RS.2,27,92,740/-. A DETAILED COMPARISON OF THE SALA RY PAID IN FY 2011-12 AND FY 2012- 13 IS ATTACHED AS ANNEXURE 4. 1.5 FURTHER, THE APPELLANT SUBMITS THAT EVEN AFTER CONSIDERING 49 NEW EMPLOYEES WHICH WERE EMPLOYED ONLY IN FY 2012-13, TOTAL SALAR Y EXPENSES FOR THE FY 2012-13 AMOUNTS TO ONLY RS.5,56,89,030 AS AGAINST ANNUALIZE D -SALARY EXPENSES OF RS.5,90,34,991 WHICH WOULD HAVE BEEN INCURRED IN FY 2011-12. THE W ORKING OF THE SAME IS ALSO ATTACHED - 4 - ITA NOS.3133/AHD/2016 DCIT VS. CYTESPACE RESEARCH PVT. LTD. ASST.YEAR 2013-14 IN ANNEXURE 5. THUS, ON AN OVERALL BASIS, YOUR HONOUR WOULD APPREC IATE THAT SALARY EXPENSES IN THE FY 2012-13 HAS DECREASED BY APPROXI MATELY 5.6% AS COMPARED TO SALARY EXPENSES IN FY 2011-12. AS AGAINST THE ABOVE DECREA SE IN SALARY COST. THE TURNOVER OF THE APPELLANT HAD INCREASED BY ALMOST 27% FROM RS. 4,10 ,44,812 IN F.Y. 2011-12 TO RS.5,21,24,174/- IN FY 2012-13. IN THIS REGARDS, IT IS SUBMITTED THAT THE LEARNED AO, PARA 3 ON PAGE 4 OF HIS ASSESSMENT ORDER HAS STATED THAT TURNOVER OF THE APPELLANT HAD REDUCED BY RS.1,10,79,362 IN FY 2012-13 AS COMPARED TO TURN OVER IN FY 2011-12 WHEN IN FACT IT HAD INCREASED BY THE SAID AMOUNT OF RS. 1,10,79,362 OVER THE PREVIOUS YEAR. THE SAME CAN ALSO BE VERIFIED FROM FINANCIAL STATEMENTS OF F Y 2012-13 ATTACHED AS ANNEXURE 1 ABOVE. IN VIEW OF THE ABOVE, IT IS STATED THAT THE ALLEGATION OF THE LEARNED AO THAT THERE IS A SHARP INCREASE IN SALARY AS COMPARED TO THE TURNO VER OF THE APPELLANT IS INCORRECT AND WITHOUT ANY BASIS. 1.6 FURTHER, THE LEARNED AO ON PAGE 6 OF THE ASSESS MENT ORDER HAS INCORRECTLY HELD THAT THE SALARIES OF TWO EMPLOYEES NAMELY MR. HIMAN SHU SHAH (THE CHIEF FINANCIAL OFFICER) AND MR. SURESH RAMU (THE CHIEF EXECUTIVE O FFICER) HAVE BEEN INCREASED IN THE CAPTIONED YEAR BY AN AMOUNT OF RS. 26,35,800/- PER EMPLOYEE. IN THIS REGARD, THE APPELLANT SUBMITS THAT BOTH ABOVE EMPLOYEES HAD JOI NED THE COMPANY ONLY WITH EFFECT FROM 1 OCTOBER 2011. THE EMPLOYMENT CONTRACT OF ABO VE TWO EMPLOYEES SHOWING THEIR DATE OF JOINING IS 1 OCTOBER 2011 IS ATTACHED AS ANNEXURE 6FOR YOUR READY REFERENCE. THUS, BOTH THESE EMPLOYEES WERE PAID SALARY ONLY FO R A PART OF THE FY 2011-12 WHEREAS THEY WERE EMPLOYED FOR FULL PART OF FY 2012-13. THU S, THE OBSERVATIONS OF THE LEARNED AO IN RELATION TO INCREASE SALARY ARE WITHOUT ANY BASI S. 1.7 FURTHER, THE LEARNED AO IN HIS ASSESSMENT ORDE R HAS STATED THAT APPELLANT HAD PAID RS.65,00,000/- AS BONUS TO THE EMPLOYEES, MR. LALIT PAI WHICH WAS WITHOUT ANY BASIS OR REASON. IN THIS REGARDS, THE APPELLANT SUB MITS THAT IT HAD EMPLOYED MR. LALIT PAI WAS APPOINTED AS HEAD - PARTNERSHIP AND TECHNOLOGY OF THE COMPANY. PRIOR TO HIS APPOINTMENT, HE WAS SR. VICE PRESIDENT AND HEAD - G LOBAL DATA MANAGEMENT OF QUINTILES TECHNOLOGIES PRIVATE LIMITED WHERE HE WOR KED FOR ALMOST 10 YEARS. HE IS QUALIFIED ENGINEER AND HAS COMPLETED HIS POST GRADU ATION FROM MM, CALCUTTA. HIS RESUME IS ATTACHED AS ANNEXURE 7 WHICH SHOWS HIS RI CH EXPERIENCE IN THIS FIELD. IN HIS PRIOR ORGANIZATION HE WAS HEADING BUSINESS OF USD 5 00 MILLION SPREAD OVER 6 COUNTRIES. HE HAD RELATIONSHIPS WITH GLOBAL PHARMACEUTICAL COM PANIES IN US, EUROPE AND JAPAN. IN VIEW OF HIS RICH EXPERIENCE AND RELATIONSHIPS, HE W AS APPOINTED BY THE COMPANY. IN THE COMPANY HE IS RESPONSIBLE FOR BUILDING AND DEVELOPI NG SALES PLANS, MENTOR SALES TEAMS AND MANAGING RELATIONSHIPS WITH CUSTOMERS. IT WAS D UE TO HIS RICH EXPERIENCE AND EXPERTISE HE BROUGHT ON, HE CONTRIBUTED TO THE INCR EASE IN TURNOVER OF THE COMPANY. 1.8. IN VIEW OF THE ABOVE, IT IS RESPECTFULLY SUBMI TTED THAT, AS MR. LALIT PAI WAS BRINGING RICH EXPERIENCE AND EXPERTISE HE WAS GIVEN ONETIME BONUS OF RS. 65,00,000/- AT THE TIME OF JOINING THE COMPANY. THE SAID AMOUNT WA S DECIDED IN THE EMPLOYMENT CONTRACT AND HENCE, AS PER THE CONTRACTUAL TERMS, T HE SAME WAS PAID TO HIM. A COPY OF THE CONTRACT WITH MR. LALIT PAI IS ATTACHED AS ANNEXURE 8TO SUBSTANTIATE THE SAME. FURTHER, APPELLANT HAS ALSO DEDUCTED TAXES DUE UNDER SECTION 192 OF THE ACT ON ENTIRE PAYMENT - 5 - ITA NOS.3133/AHD/2016 DCIT VS. CYTESPACE RESEARCH PVT. LTD. ASST.YEAR 2013-14 MADE TO MR. LALIT PAI. HENCE, THE ENTIRE EXPENDITUR E WAS GENUINE AND TDS WAS APPROPRIATELY DEDUCTED ON THE SAME. THUS, THE ALLEG ATION OF THE LEARNED AO THAT AMOUNT PAID TO LALIT PAI WAS WITHOUT ANY BUSINESS EXPEDIEN CY IS INCORRECT AND WITHOUT ANY BASIS. 1.9 IN ADDITION TO THE ABOVE, THE LEARNED AO HAS AL LEGED THAT MR. BHAVESH ACHARYA, AN EMPLOYEE OF THE COMPANY WAS PAID HIGHER SALARY T O COMPENSATE FOR LOSSES INCURRED INVESTMENT MADE IN THE APPELLANT COMPANY. THE APPEL LANT COMPANY HAD APPOINTED MR.BHAVESH ACHARYA AS SENIOR DIRECTOR - PROJECT SOL UTIONS ONLY ON 4 AUGUST 2012 AND HENCE; THERE WAS NO INCREASE IN SALARY AS COMPARED TO EARLIER YEAR, AS HE WAS NOT AT ALL EMPLOYEED IN FY 2011-12. HENCE, THERE IS NO QUESTIO N OF ANY COMPENSATION BEING PAID TO HIM FOR LOSS IN HIS INVESTMENT VALUE. ACCORDIN GLY, IT SEEMS THAT THERE IS SOME MISUNDERSTANDING WHILE REPLYING TO QUESTION NO. 7 R ECORDED BY LEARNED AO UNDER SECTION 131 OF THE ACT. COPY OF STATEMENT OF MR. BHAVESH AC HARYA RECORDED UNDER SECTION 131 OF THE ACT ENCLOSED AS ANNEXURE 9. FURTHER, THE SALARY PAID TO HIM WAS THE SAME AS AGREED IN THE EMPLOYMENT CONTRACT WHICH IS ATTACHED AS ANN EXURE 10 FOR YOUR READY REFERENCE. THUS, THE OBSERVATIONS OF THE LEARNED AO THAT MR. B HAVESH ACHARYA WAS COMPENSATED FOR FALL IN INVESTMENT VALUE IS INCORRECT AND WITHOUT A NY BASIS. 1.10 FURTHER, MR. BHAVESH ACHARYA BROUGHT A TOTAL OF 19 YEARS OF EXPERIENCE IN CLINICAL DATA MANAGEMENT AND 4 YEARS IN SITE MANAGE MENT TO THE APPELLANT COMPANY WHICH SUBSTANTIATED SALARY PAID TO HIM. COPY OF HIS RESUME SHOWING HIS RICH QUALIFICATIONS AND EXPERIENCE IS ATTACHED AS ANNEXU RE 11 FOR YOUR READY REFERENCE. 1.11 BASED ON THE ABOVE, IT IS SUBMITTED THAT ACTIO N OF LEARNED AO IN DISALLOWING SALARY EXPENSES IS WITHOUT ANY BASIS AND IS BASED O N MERE SURMISES AND CONJECTURES. 1.12 COMMERCIAL EXPEDIENCY OF THE PAYMENTS:- WITHOU T PREJUDICE TO THE FACT THAT THE APPELLANT HAS RECEIVED SERVICES FROM ITS EMPLOYEES AND THERE IS NO DISPUTE WITH REGARDS TO RENDING OF SUCH SERVICES, THE APPELLANT SUBMITS THAT REASONABLENESS OF EMPLOYEE EXPENSES IS NOT RELEVANT FOR CLAIMING DEDUCTION OF EXPENSES UNDER SECTION 37(1). FURTHER, IT IS SUBMITTED THAT THE COMMERCIAL EXPEDIENCY/ BUSINESS RATIONALE OF A PARTICULAR EXPENDITURE INCURRED BY THE APPELLANT FOR SMOOTH FU NCTIONING AND FURTHERANCE OF ITS BUSINESS PREROGATIVE. HENCE, NO DISALLOWANCE UNDER SECTION 37(1) OF THE ACT SHOULD BE MADE ON THE BASIS THAT EXPENSES IS FOUND TO BE UNRE ASONABLE OR EXCESSIVE. 1.13 IN THIS REGARDS, THE APPELLANT HUMBLY SUBMITS THAT THE ABOVE EXPENSE HAVE BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE APPELLANT'S BUSINESS AND THE LEARNED AO HAS NOWHERE CONTENDED THAT THESE EXPENSE S WERE NOT UNDERTAKEN FOR THE PURPOSE OF BUSINESS. ACCORDINGLY, AS ALL SALARY EXP ENSES WERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE APPE LLANT, THE SAME SHOULD BE ALLOWED AS A DEDUCTION UNDER SECTION 37(1) OF THE ACT. 1.14 IN THIS REGARD, APPELLANT SUBMITS THAT HON'BLE SUPREME COURT IN THE CASE OF SASSOON J DAVID AND CO (P) LTD V CIT (118ITR 261), OBSERVED AS FOLLOWS: - 6 - ITA NOS.3133/AHD/2016 DCIT VS. CYTESPACE RESEARCH PVT. LTD. ASST.YEAR 2013-14 IT HAS TO BE OBSERVED HERE THAT THE EXPRESSION 'WH OLLY AND EXCLUSIVELY' USED IN S. 10(2)(XV) OF THE ACT DOES NOT MEAN 'NECESSARILY'. O RDINARILY, IT IS FOR THE ASSESSEE TO DECIDE WHETHER ANY EXPENDITURE SHOULD BE INCURRE D IN THE COURSE OF HIS OR ITS BUSINESS. SUCH EXPENDITURE MAY BE INCURRED VOLUNTAR ILY AND WITHOUT ANY NECESSITY AND IF IT IS INCURRED FOR PROMOTING THE BUSINESS AN D TO EARN PROFITS, THE ASSESSEE CAN CLAIM DEDUCTION UNDER SECTION 10(2)(XV) OF THE ACT EVEN THOUGH THERE WAS NO COMPELLING NECESSITY TO INCUR SUCH EXPENDITURE. IT IS RELEVANT TO REFER AT THIS STAGE TO THE LEGISLATIVE HISTORY OF S. 37 OF THE I.T. ACT , 1961, WHICH CORRESPONDS TO S. 10(2)(XV) OF THE ACT. AN ATTEMPT WAS MADE IN THE I. T. BILL OF 1961 TO LAY DOWN THE 'NECESSITY 'OF THE EXPENDITURE AS A CONDITION FOR C LAIMING DEDUCTION UNDER S. 37. SECTION 37(1) IN THE BILL READ 'ANY EXPENDITURE ... ... LAID OUT OR EXPENDED WHOLLY, NECESSARILY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED ...........'. THE INTRODUCTION OF THE WORD 'NECESSARILY' IN THE ABOVE SECTION RESULTED IN PUBLIC PROTEST. CONSEQUENTLY, WHEN S. 3 7 WAS FINALLY ENACTED INTO LAW. THE WORD 'NECESSARILY 'CAME TO BE DROPPED.' 1.5 THUS, BASED ON THE ABOVE RULING IT IS EVIDENT T HAT AS LONG AS ASSESSEE HAS INCURRED ANY EXPENDITURE FOR THE PURPOSE OF ITS BUSINESS, IT WOULD BE ALLOWED AS A DEDUCTION EVEN IF THERE WAS NO COMPELLING NECESSITY TO INCUR SUCH EXP ENSES. 1.16 FURTHER, HON'BLE SUPREME COURT IN THE CASE OF CIT V MALAYALAM PLANTATIONS LTD ( 53 ITR 140), HAS EXPLAINED THE CONCEPT 'FOR THE PUR POSE OF BUSINESS' AS FOLLOWS: THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' IS WI DER IN SCOPE THAN THE EXPRESSION 'FOR THE PURPOSE OF EARNING PROFITS'. IT S RANGE IS WIDE: IT MAY TAKE IN NOT ONLY THE DAY TO DAY RUNNING OF A BUSINESS BUT A LSO THE RATIONALIZATION OF ITS ADMINISTRATION AND MODERNIZATION OF ITS MACHINERY; IT MAY INCLUDE MEASURES FOR THE PRESERVATION OF THE BUSINESS AND FOR THE PROTEC TION OF ITS ASSETS AND PROPERTY FROM EXPROPRIATION, COERCIVE PROCESS OR ASSERTION O F HOSTILE TITLE; IT MAY ALSO COMPREHEND PAYMENT OF STATUTORY DUES AND TAXES IMPO SED AS A PRE-CONDITION TO COMMENCE OR FOR CARRYING ON OF A BUSINESS; IT MAY C OMPREHEND MANY OTHER ACTS INCIDENTAL TO THE CARRYING ON OF A BUSINESS... .. THE PURPOSE SHALL BE PURPOSE OF THE BUSINESS, THAT IS TO SAY, THE EXPENDITURE IN CURRED SHALL BE FOR THE CARRYING ON OF THE BUSINESS AND THE ASSESSES SHALL INCUR IT IN HIS CAPACITY AS A PERSON CARRYING ON THE BUSINESS 1.17 THE ABOVE OBSERVATIONS BRING OUT THE FOLLOWING ATTRIBUTES IN RESPECT OF THE EXPENDITURE THAT MAY BE ALLOWABLE: WHAT IS COMPREHENDED AS AN ALLOWABLE EXPENDITURE IS A VERY WIDE SPECTRUM OF EXPENDITURE; IN ORDER THAT THE EXPENDITURE QUALIFIES AS EXPENDIT URE INCURRED 'WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS', IT I S NOT REQUIRED TO CONCLUSIVELY DEMONSTRATE THAT THE EXPENDITURE WAS INCURRED OUT O F A COMPELLING NECESSITY, BUT WAS INCURRED ON FOR THE PURPOSE OF ASSESSEE'S BUSIN ESS; - 7 - ITA NOS.3133/AHD/2016 DCIT VS. CYTESPACE RESEARCH PVT. LTD. ASST.YEAR 2013-14 IT IS FOR THE ASSESSEE TO DECIDE WHETHER ANY EXPEND ITURE SHOULD BE INCURRED IN THE COURSE OF HIS BUSINESS. 1.18 FURTHER, THERE ARE VARIOUS JUDICIAL PRECEDENTS WHICH HAVE RECOGNIZED THAT ANY EXPENSES INCURRED WHOLLY AND EXCLUSIVELY FOR THE PU RPOSES OF THE ASSESSEE'S BUSINESS ARE TO BE ALLOWED AS A DEDUCTION AND REASONABLENESS OF THE EXPENDITURE CANNOT BE TAKEN AS A PLEA TO DISALLOW THE SAME. 1.19 IT IS NOT OPEN TO THE DEPARTMENT TO ADOPT A SU BJECTIVE STANDARD OF REASONABLENESS AND DECIDE WHAT TYPE OF EXPENDITURE THE ASSESSEE SH OULD INCUR AND IN WHAT CIRCUMSTANCES. THE DEPARTMENT CANNOT JUSTIFIABLY CL AIM TO PUT ITSELF IN THE CHAIR OF THE BUSINESSMAN AND ASSUME THE SAID ROLE TO DECIDE HOW MUCH IS A REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. 1.20 RELIANCE IN THIS REGARD IS PLACED ON THE FOLL OWING JUDICIAL PRECEDENTS: CIT V DHANRAJGIRJI RAJA NARASINGIRJI (91 ITR 544) ( SC), THE HON'BLE SUPREME COURT HAS HELD AS FOLLOWS: IT IS NOT OPEN TO THE DEPARTMENT TO PRESCRIBE WHAT EXPENDITURE AN ASSESSEE SHOULD INCUR AND IN WHAT CIRCUMSTANCES HE SHOULD INCUR THAT EXPENDITURE. EVERY BUSINESSMAN KNOWS HIS INTEREST B EST. THUS, WHETHER OR NOT A PARTICULAR EXPENDITURE HAS T O BE INCURRED, DEPENDS ON THE PERCEPTION OF THE BUSINESSMAN / ASSESSEE, AND THIS BUSINESS PERCEPTION CANNOT BE SUBSTITUTED BY THE REVENUE'S PERCEPTION OF WHETHER OR NOT SUCH EXPENDITURE SHOULD HAVE BEEN INCURRED. IN CIT V PANIPAT WOOLEN AND GENERAL MILLS (103 ITR 66) (SC), THE HON'BLE SUPREME COURT HAS HELD THAT: BEFORE COMING TO THE FACTS IT MAY BE NECESSARY TO MENTION THAT THERE CAN BE NO DISPUTE WITH RESPECT TO THE TWO IMPORTANT PROPOSITI ONS: (1) THAT IN ORDER TO FALL WITHIN SECTION 10(2)(XV) OF T HE ACT1 THE DEDUCTION CLAIMED MUST AMOUNT TO AN EXPENDITURE WHICH WAS LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS, PROFES SION OR VOCATION. THIS WILL NATURALLY DEPEND UPON THE FACTS OF EACH CASE. (2) THAT IN ORDER TO DETERMINE THE QUESTION OF REASONAB LENESS OF THE EXPENDITURE, THE TEST OF COMMERCIAL EXPEDIENCY WOULD HAVE TO BE ADJU DGED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT OF THE INCOME-TAX DEPART MENT.' CIT V KHAMBATTA FAMILY TRUST (2013) 34 TAXMANN.COM 36 (GUJARAT HIGH COURT) - 8 - ITA NOS.3133/AHD/2016 DCIT VS. CYTESPACE RESEARCH PVT. LTD. ASST.YEAR 2013-14 IN THE LIGHT OF THE PRINCIPLES PROPOUNDED IN THE DE CISIONS REFERRED TO HEREINABOVE, IT IS APPARENT THAT WHILE EXAMINING A CLAIM FOR DEDUCTION UNDER SECTION 37 OF THE ACT, WHAT HAS TO BE SEEN IS WHETHER THE EXPENDITURE HAD BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE ASSESSEE'S BUSIN ESS AND WHETHER IT FALLS UNDER ANY OF THE EXCEPTIONS CARVED OUT UNDER SUB-SECTION (2B) TH EREOF, AND NOTHING MORE. ONCE IT IS FOUND THAT THE EXPENDITURE HAD BEEN INCURRED BY THE ASSESSEE FOR PUBLICITY OR ADVERTISEMENT, IT IS NOT FOR THE DEPARTMENT TO CONS IDER WHAT COMMERCIAL EXPEDIENCY JUSTIFIED SUCH EXPENDITURE. IT IS, THEREFORE NOT PE RMISSIBLE FOR THE ASSESSING OFFICER TO SCRUTINIZE THE CLAIM ANY FURTHER TO EXAMINE AS TO W HETHER IN THE PROCESS ANY THIRD PARTY HAS ALSO BENEFITED. THE MERE FACT THAT ON ACC OUNT OF THE EXPENDITURE INCURRED BY THE ASSESSEE WHOLLY AND EXCLUSIVELY FOR ITS OWN BUS INESS, INCIDENTALLY SOME THIRD PARTY IS ALSO BENEFITED IS NO GROUND TO DISALLOW ANY PART OF SUCH EXPENDITURE. CIT VS JAGANNATH KISONLAL(30 ITR 654)(BOM) SUBSEQUENTLY APPROVED BY THE SUPREME COURT (41 ITR 360), IT HAS BEEN HELD AS FOL LOWS: 'AN EXPENDITURE MAY NOT HELP AN ASSESSEE TO EARN TH E INCOME OR TO INCREASE THE INCOME, AND YET FROM THE POINT OF VIEW OF COMMERCIA L EXPEDIENCY IT MAY BE NECESSARY FOR THE BUSINESS; FOR INSTANCE, IT MAY BE NECESSARY TO PRESERVE THE ASSETS OF THE BUSINESS OR TO INCREASE THE REPUTATION OF THE BUSIN ESS. IT MAY NOT BRING IN RESULTS IN THE SENSE OF INCREASED INCOME AND YET A COMMERCIAL MAN MAY THINK THAT THOSE EXPENSES ARE NECESSARY FROM A COMMERCIAL POINT OF V IEW FOR THE PURPOSE OF THE BUSINESS.' COMMISSIONER OF INCOME-TAX V SALES MAGNESITE (PVT.) LTD. (214 ITR 1)(BOM) 'THE QUESTION WHETHER EXPENDITURE INCURRED FOR THE PURPOSES OF BUSINESS MUST BE VIEWED IN THE LARGER CONTEXT OF BUSINESS NECESSITY OR COMMERCIAL EXPEDIENCY. NO ABSTRACT OR PEDANTIC VIEW CAN BE TAKEN IN THE MATTE R'. 1.21 BASED ON THE ABOVE JUDICIAL PRECEDENTS, THE A SSESSEE WOULD LIKE TO EMPHASIZE THAT THE LEARNED AO SHOULD NOT EXAMINE OR QUESTION THE C OMMERCIAL EXPEDIENCY OF THE EXPENDITURE BEING INCURRED BY THE ASSESSEE AND ACCO RDINGLY, THE SAME SHOULD BE ALLOWED AS A DEDUCTION IN ITS ENTIRETY. 1.22 ACCORDINGLY, IT IS HUMBLY SUBMITTED THAT THE D ISALLOWANCE MADE BY THE LEARNED AO, ON ACCOUNT PAYMENT OF SALARY EXPENSES TREATING THE SAME AS EXCESSIVE, IS BAD IN LAW AND HENCE THE APPELLANT REQUESTS THAT THE LEARNED AO BE DIRECTED TO DELETE THE SAID DISALLOWANCE. 2.3 FURTHER, THE APPELLANT HAS SUBMITTED THE SUBMIS SION DT. 20/09/2016 BEFORE CIT (APPEALS) IS REPRODUCED AS UNDER:- 1.1 IN THE INSTANT CASE, THE LEARNED AO HAD CONTEND ED THAT SALARY OF DIRECTORS / EMPLOYEES WERE INCREASED WITHOUT ANY JUSTIFICATION. FURTHER, THE LEARNED AO HAD ALSO - 9 - ITA NOS.3133/AHD/2016 DCIT VS. CYTESPACE RESEARCH PVT. LTD. ASST.YEAR 2013-14 HELD THAT JOINING BONUS OF RS. 65,00,000/- PAID TO LALIT PAI WAS WITHOUT ANY REASON OR BUSINESS EXPEDIENCY. ACCORDINGLY, THE LEARNED AO HA S DISALLOWED EMPLOYEE BENEFIT EXPENSES AMOUNTING TO RS. 3,41,72,205 (RS.6,25,64,2 80 MINUS RS. 2,83,92,075) BEING EXPENSES ADDITIONALLY INCURRED IN THE CAPTIONED YEA R, AY 2013-14 AS COMPARED TO EMPLOYEES BENEFIT EXPENSES INCURRED IN THE PREVIOUS YEAR, I.E. AY 2012-13 WITHOUT ANY BASIS . 1.2 IN THIS REGARDS, AS MENTIONED IN OUR EARLIER S UBMISSION DATED 22 AUGUST 2016, APPELLANT RESPECTFULLY SUBMITS THAT INCREASE IN SAL ARY EXPENSES IN THE CAPTIONED YEAR WAS ONLY BECAUSE OF EMPLOYEES WERE EMPLOYED FOR FULL YE AR IN THE CAPTIONED YEAR WHEREAS THEY WERE EMPLOYED FOR ONLY PART OF THE PREVIOUS YE AR. FURTHER, ALL SALARY PAYMENT MADE TO EMPLOYEES / DIRECTORS WERE MADE FOR THE PURPOSE OF ITS BUSINESS AND COMMENSURATE WITH THE SERVICES RENDERED BY THEM AND THE SAME WAS IN NO MANNER EXCESSIVE AND THE SAME WAS FOR THE PURPOSE OF BUSINESS OF THE COMPANY . ADDITIONALLY, THERE IS NO DISPUTE BY THE BY THE LEARNED AO THAT ALL EMPLOYEES AND DIRECT ORS HAVE RENDERED SERVICES DURING THE CAPTIONED YEAR. FURTHER, THE LEARNED AO HAS NO WHERE DISPUTED PAYMENTS MADE TO DIRECTORS WERE EXCESSIVE UNDER SECTION 40A(2)(B) OF THE ACT. 1.3 ADDITIONALLY, THE APPELLANT ALSO SUBMITS THAT REMUNERATION PAID TO ITS DIRECTORS AS WELL AS ITS EMPLOYEES LALIT PAIAND BHAVESH ACHARYA WHICH WERE TREATED TO BE EXCESSIVE BY THE LEARNED AO HAVE BEEN TAXED AS SALARY INCOME IN HANDS OF ITS DIRECTORS AND ITS EMPLOYEES. FURTHER, THEY ARE COVERED IN THE HIGHEST TAX BRACKET OF 30 PERCENT. IN THIS REGARD, COPY OF ACKNOWLEDGMENT OF RETURN OF INCOME FOR AY 2013-14 PERTAINING TO DIRECTORS, SURESH RAMU AND HIMANSHU SHAH AND EMPLOY EES, LALIT PAI AND BHAVESH ACHARYA ARE ATTACHED AS ANNEXURE 1, ANNEXURE 2, ANNEXURE 3 AND ANNEXURE 4 R ESPECTIVELY. THE SAID ACKNOWLEDGMENT OF RETURN OF I NCOME FOR THE CAPTIONED YEAR SUBSTANTIATES THAT THEY ARE COVERED IN HIGHEST TAX BRACKET OF 30 PERCENT. HENCE, AS THE APPELLANT AS WELL AS ITS DIRECTORS AND EMPLOYEES WE RE BOTH ASSESSED TAX AT THE RATE OF 30%, THE ISSUE IS REVENUE NEUTRAL. 1.4 THE LEARNED AO HAS FAILED TO APPRECIATE THAT TA X HAS ALREADY BEEN PAID ON SUCH INCOME BY THE DIRECTORS AND ITS EMPLOYEES. HENCE, T HE DISALLOWING THE SAME IN THE HANDS OF THE APPELLANT WOULD TANTAMOUNT TO DOUBLE TAXATIO N. 1.5 IN THIS REGARD, APPELLANT WOULD ADDITIONALLY L IKE TO SUBMIT THAT THE JURISDICTIONAL HON'BLE GUJARAT HIGH COURT IN THE CASE OF PWS ENGINEERS LIMITED VS. DCIT (TAX APPEAL NO. 209 OF 2015) HAS HELD THAT WHERE REMUNERATION WAS TAXED IN THE H ANDS OF DIRECTOR AT THE SAME RATE AT WHICH IT WOULD HAVE BE EN TAXED IN THE HANDS OF THE COMPANY, THE SAME WOULD BE REVENUE NEUTRAL. HENCE, DISALLOWI NG THE REMUNERATION TO BE EXCESSIVE IN THE HANDS OF THE COMPANY, WOULD AMOUNT TO DOUBLE TAXATION WHICH IS NOT POSSIBLE. ACCORDINGLY, HON'BLE HIGH COURT ALLOWED THE APPEAL OF THE COMPANY. THE RELEVANT PORTION OF THE JUDGMENT IS AS UNDER: 'IN THIS CONTEXT, WE MAY RECALL THAT CONSISTENTLY B EFORE ASSESSING OFFICER, CIT(APPEALS) AND TRIBUNAL, THE ASSESSEE AND CONVASS ED THAT ALL THE FOUR DIRECTORS WHO HAD RECEIVED SUCH REMUNERATION, WERE TAXED IN THE HIGHEST BRACKET - 10 - ITA NOS.3133/AHD/2016 DCIT VS. CYTESPACE RESEARCH PVT. LTD. ASST.YEAR 2013-14 OF 30%; AT THE SAME RATE AT WHICH THE ASSESSEE COMP ANY AT THE RELEVANT TIME WAS ASSESSED. IN FACT, THE ASSESSEE HAD DEMONSTRATED BE FORE CIT(APPEALS) THAT THE TAX LIABILITY OF THE COMPANY ON SUCH DISPUTED REMUNERAT ION ABOUT WAS EXACTLY THE SAME AS THE TAX THE FOUR DIRECTORS HAD PAID TO THE REVENUE. TO THESE FACTUAL ASPECTS, EVEN THE REVENUE HAS, AT NO STAGE RAISED A NY DISPUTE. WE, MAY THEREFORE, PROCEED ON THE BASIS THAT THE ELEMENT OF EXCESSIVE REMUNERATION REPRESENTS THAT INCOME OF THE COMPANY WHICH WAS EVENTUALLY TAXED IN THE HANDS OF THE DIRECTORS AT THE SAME RATE AT WHICH; HAD IT NOT BEEN SO DISTR IBUTED; WOULD HAVE BEEN, TAXED IN THE HANDS OF THE COMPANY. IN THAT VIEW OF THE MA TTER, THE QUESTION OF REVENUE NEUTRALITY WOULD IMMEDIATELY ARISE. A CERTAIN INCOM E HAS ALREADY BEEN TAXED IN THE HANDS OF THE DIRECTORS. PERMITTING THE REVENUE TO TAX THE SAME INCOME AGAIN AT THE SAME RATE IN THE HANDS OF THE PRINCIPAL PAYE R WOULD AMOUNT TO DOUBLE TAXATION. ONLY ON THIS COUNT, WE ANSWER QUESTION IN FAVOUR OF THE APPELLANT- ASSESSEE AND AGAINST REVENUE, ALLOW THE APPEAL AND SET ASIDE THE ORDER OF THE TRIBUNAL. THE TAX APPEAL IS DISPOSED OF ACCORDINGLY .' 1.6 BASED ON THE ABOVE JUDICIAL PRECEDENT, IT IS H UMBLY SUBMITTED THAT THE DISALLOWANCE MADE BY THE LEARNED AO, ON ACCOUNT PAY MENT OF SALARY EXPENSES TREATING THE SAME AS EXCESSIVE, IS BAD IN LAW AND HENCE THE APPELLANT REQUESTS THAT THE LEARNED AO BE DIRECTED TO DELETE THE SAID DISALLOWANCE'. ULTIMATELY, ADDITION WAS DELETED BY THE LEARNED CI T(A) UPON CONSIDERING SUCH SUBMISSION MADE BY THE ASSESSEE AND ALSO UPON TAKIN G INTO CONSIDERATION THE FINANCIAL STATEMENT PLACED BEFORE THE FIRST APPELLATE AUTHORI TY AND THE JUDGMENT RELIED UPON BY THE ASSESSEE IN SUPPORT OF HIS CASE. 4. AT THE TIME OF HEARING OF THE INSTANT APPEAL, TH E LEARNED COUNSEL APPEARING FOR THE ASSESSEE SUBMITTED BEFORE US THAT THE ERROR COMMITT ED BY THE LEARNED AO WAS DULY POINTED OUT BEFORE THE FIRST APPELLATE AUTHORITY IN ALL COUNTS. APART FROM THAT THE COMMERCIAL EXPEDIENCY OF THE PAYMENTS FOR SMOOTH FU NCTIONING AND FURTHERANCE OF ITS BUSINESS WAS ALSO DULY PLACED BEFORE THE AUTHORITIE S BELOW. IT WAS FURTHER SUBMITTED BY THE LEARNED AR THAT IT IS FOR THE ASSESSEE TO DECID E WHETHER ANY EXPENDITURE SHOULD BE INCURRED IN THE COURSE OF HIS OR ITS BUSINESS. SUCH EXPENDITURE MAY BE INCURRED VOLUNTARILY AND WITHOUT ANY NECESSITY AND IF IT IS INCURRED FOR PROMOTING THE BUSINESS AND TO EARN PROFIT, THE ASSESSEE CAN CLAIM DEDUCTION UNDER SECT ION 10(2)(XV) OF THE ACT EVEN THOUGH - 11 - ITA NOS.3133/AHD/2016 DCIT VS. CYTESPACE RESEARCH PVT. LTD. ASST.YEAR 2013-14 THERE WAS NO COMPELLING NECESSITY TO INCUR SUCH EXP ENDITURE. IN THIS ASPECT RELIANCE WERE PLACED IN THE JUDGMENT PASSED BY THE APEX COURT IN THE MATTER OF SASSOON J. DEVID AND CO. (P) LTD.-VS-CIT REPORTED IN 118 ITR 261. APART FROM THAT WHERE REMUNERATION WAS TAXED IN THE HANDS OF THE DIRECTORS AT THE SAME RAT E AT WHICH IT WOULD HAVE BEEN TAXED IN THE HANDS OF THE COMPANY THE SAME WOULD BE REVENUE NEUTRAL. THE JUDGMENT PASSED BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF PWS EN GINEERS LTD.-VS-DCIT IN TAX APPEAL NO.209/2015 WAS RELIED UPON BY THE LEARNED AR. HE, THEREFORE, PRAYS FOR CONFIRMATION OF THE ORDER PASSED BY THE LEARNED CIT(A). ON THE O THER HAND, THE LEARNED DR RELIED UPON THE ORDER PASSED BY THE LEARNED AO. 5. HEARD THE RESPECTIVE PARTIES, PERUSED THE RELEVA NT MATERIALS AVAILABLE ON RECORD. WE FIND THAT WHILE DELETING ADDITION THE LEARNED CI T(A) OBSERVED AS FOLLOWS: 2.4. I HAVE CAREFULLY CONSIDERED THE ASSESSMENT O RDER AND SUBMISSION FILED BY THE APPELLANT. THE ASSESSING OFFICER HAS OBSERVED THAT APPELLANT HAS INCURRED EMPLOYEES BENEFIT EXPENSES OF RS.6, 25,64,280/- FOR AY 2013-14 AS AGAINST EMPLOYEE BENEFIT EXPENDITURE OF RS. 2,83,92,075/- INCURRED IN AY 2012-13. THE AO OBSERVED THAT THERE WAS NO COMMENSURATE INCREASE IN THE TURNOVER WHEREAS TH E SALARY EXPENDITURE HAD SUBSTANTIALLY INCREASED AS COMPARED TO THE PRECEDING YEAR. THE AO STATED THE MAIN REASON FOR SUCH INCREASE IN SALARY IS DUE TO THE INCREASE IN SALARY OF THE DIRECTORS AND SOME OF THE EMPLOYEES. AS PER AO, THERE WAS INCREASE IN REMUNERATION PAID TO TWO DIRECTORS NAMELY, SHRI HIMANSHU SHAH AND SHRI SURES H RAMU, IN THE CURRENT YEAR BY RS.26,35,800/- AS COMPARED TO THE PREVIOUS YEAR WHI CH WAS WITHOUT ANY JUSTIFICATION. FURTHER, THE AO HELD THAT ANOTHER EMPLOYEE OF THE C OMPANY, SHRI LALIT PAIWAS PAID A JOINING BONUS OF RS.65,00,000/- WITHOUT ANY REASON OR JUSTIFICATION. ADDITIONALLY, THE AO AFTER TAKING STATEMENT ON RECORD OF AN EMPLOYEE, SH RI BHAVESH ACHARYA U/S 131 OF THE ACT HELD THAT THE APPELLANT COMPANY HAD PAID EXCESS SAL ARY TO SHRI BHAVESH ACHARYA IN AY 2013-14 TO COMPENSATE FOR LOSS HE INCURRED WHILE IN VESTING IN SHARES OF THE APPELLANT COMPANY. THUS, THE AO DISALLOWED EMPLOYEE BENEFIT E XPENSES OF RS.3,41,72,205/- WHICH WAS INCREMENTAL SALARY INCURRED IN AY 2013-14 AS CO MPARED TO THE TOTAL SALARY EXPENSES INCURRED IN THE AY 2012-13, WHILE PASSING THE ASSES SMENT ORDER. 2.5. THE APPELLANT HAS SUBMITTED THAT THE AO HAS NOT CON SIDERED THE FACT THAT THE APPELLANT COMPANY WAS INCORPORATED ONLY ON 11 MARCH 2011 AND HENCE, FY 2011-12 WAS THE FIRST YEAR OF OPERATION. SUBSEQUENTLY, IN T HE CAPTIONED YEAR, ALL THESE EMPLOYEES WHICH WERE EMPLOYED FOR PART OF THE PREVIOUS YEAR, WERE EMPLOYED FOR FULL PART OF THE CAPTIONED YEAR AND HENCE, THEIR TOTAL SALARY EXPENS ES FOR THE ENTIRE YEAR WAS INCLUDED ONLY IN CAPTIONED YEAR, I.E. FY 2012-13. THEREFORE, UPON A COMPARISON OF THE ANNUAL/ZED SALARY FOR SAME EMPLOYEES WHICH WERE EMPLOYED IN EA RLIER YEAR I.E. FY 2011-12, THE - 12 - ITA NOS.3133/AHD/2016 DCIT VS. CYTESPACE RESEARCH PVT. LTD. ASST.YEAR 2013-14 SAME WOULD AMOUNT TO RS.5,90,34,991 AGAINST WHICH A CTUAL SALARY PAID TO THEM IN FY 2012-13 WAS RS.3,62,15,515. HENCE, IN RESPECT OF SA ME EMPLOYEES WHICH WERE EMPLOYED IN BOTH FY 2011-12 AS WELL AS FY 2012-13, THERE WAS DECREASE IN THEIR SALARY EXPENSES BY RS. 2,27,92,740/-. A DETAILED COMPARISON OF THE SALARY PAID IN FY 2011-12 AND FY 2012-13 IS ATTACHED AS ANNEXURE 4. 2.5.1. FURTHER, THE APPELLANT SUBMITS THAT EVEN AFTER CONS IDERING 49 NEW EMPLOYEES WHICH WERE EMPLOYED ONLY IN FY 2012-13, TOTAL SALAR Y EXPENSES FOR THE FY 2012-13 AMOUNTS TO ONLY RS.5,56,89,030/- AS AGAINST ANNUALL ZED SALARY EXPENSES OF RS. 5,90,34,991/- WHICH WOULD HAVE BEEN INCURRED IN FY 2011-12. THE WORKING OF THE SAME IS A/SO ATTACHED IN ANNEXURE 5. THUS, ON AN OVERALL BASIS, IT WOULD BE APPRECIATED THAT SALARY EXPENSES IN THE FY 2012-13 HAS DECREASED BY APPROXIMATELY 5.6% AS COMPARED SALARY EXPENSES IN FY 2011-12. AS AGAINST THE ABOVE DECREASE IN SALARY COST, THE TURNOVER OF THE APPELLANT HAD INCREASED BY ALMOST 2 7% FROM RS.4,10,44,812/- IN FY 2011-12 TO RS.5,21,24,174/- IN FY 2012-13. IN THIS REGARDS, IT IS SUBMITTED THAT THE AO, PARA 3 ON PAGE 4 OF HIS ASSESSMENT ORDER HAS STATED THAT TURNOVER OF THE APPELLANT HAD REDUCED BY RS. 1,10, 79,362/- IN FY 2012-13 AS COMPARED TO TURNOVER IN FY 2011-12 WHEN IN FACT IT HAD INCREASED BY THE SAID AMOUNT OF RS. 1,10, 79,362/- OVER THE PREVIOUS YEAR. 2.5.2. FURTHER, THE APPELLANT SUBMITS THAT AO ON P AGE 6 OF THE ASSESSMENT ORDER HAS INCORRECTLY HELD THAT THE SALARIES OF TWO EMPLOYEES NAMELY MR. HIMANSHU SHAH (THE CHIEF FINANCIAL OFFICER) AND MR. SURESH RAMU (CHIEF EXECU TIVE OFFICER) HAVE BEEN INCREASED IN THE CAPTIONED YEAR BY AN AMOUNT OF RS. 26,35,800 /- PER EMPLOYEE. IN THIS REGARD, THE APPELLANT SUBMITS THAT BOTH ABOVE EMPLOYEES HAD JOI NED THE COMPANY ONLY WITH EFFECT FROM 1 OCTOBER 2011. THE EMPLOYMENT CONTRACT OF ABO VE TWO EMPLOYEES SHOWING THEIR DATE OF JOINING IS 1 OCTOBER 2011 IS ATTACHED AS AN NEXURE 6 FOR REFERENCE. THUS, BOTH THESE EMPLOYEES WERE PAID SALARY ONLY FOR A PART OF THE FY 2011-12 WHEREAS THEY WERE EMPLOYED FOR FULL PART OF FY 2012-13. THUS, THE OBS ERVATIONS OF THE LEARNED AO IN RELATION TO INCREASED SALARY ARE WITHOUT ANY BASIS. 2.5.3. FURTHER, THE APPELLANT SUBMITS THAT AO IN H IS ASSESSMENT ORDER HAS STATED THAT APPELLANT HAD PAID RS. 65,00,000/- AS BONUS TO THE EMPLOYEES, MR. LALIT PAI WHICH WAS WITHOUT ANY BASIS OR REASON. IN THIS REGARDS, THE A PPELLANT SUBMITS THAT IT HAD EMPLOYED MR. LALIT PAI WAS APPOINTED AS HEAD - PARTNERSHIP A ND TECHNOLOGY OF THE COMPANY. HE IS QUALIFIED ENGINEER AND HAS COMPLETED HIS POST GR ADUATION FROM IIM, CALCUTTA. HIS RESUME IS ATTACHED AS ANNEXURE 7 WHICH SHOWS HIS RI CH EXPERIENCE IN THIS FIELD. IN HIS PRIOR ORGANIZATION HE WAS HEADING BUSINESS OF USD 5 00 MILLION SPREAD OVER 6 COUNTRIES. HE HAD RELATIONSHIPS WITH GLOBAL PHARMACEUTICAL COM PANIES IN US, EUROPE AND JAPAN. IN VIEW OF HIS RICH EXPERIENCE AND RELATIONSHIPS, HE W AS APPOINTED BY THE COMPANY. IT WAS DUE TO HIS RICH EXPERIENCE AND EXPERTISE HE BROUGHT ON, HE CONTRIBUTED TO THE INCREASE IN TURNOVER OF THE COMPANY. THE SAID AMOUNT WAS DECIDE D IN THE EMPLOYMENT CONTRACT AND HENCE, AS PER THE CONTRACTUAL TERMS, THE SAME WAS P AID TO HIM. A COPY OF THE CONTRACT WITH MR. LALIT PAL IS ATTACHED AS ANNEXURE 8 TO SUB STANTIATE THE SAME. FURTHER, APPELLANT HAS ALSO DEDUCTED TAXES DUE UNDER SECTION 192 OF TH E ACT ON ENTIRE PAYMENT MADE TO - 13 - ITA NOS.3133/AHD/2016 DCIT VS. CYTESPACE RESEARCH PVT. LTD. ASST.YEAR 2013-14 MR.LALIT PAI. HENCE, THE ENTIRE EXPENDITURE WAS GEN UINE AND TDS WAS APPROPRIATELY DEDUCTED ON THE SAME. THUS, THE ALLEGATION OF THE L EARNED AO THAT AMOUNT PAID TO LALIT PAI WAS WITHOUT ANY BUSINESS EXPEDIENCY IS INCORREC T AND WITHOUT ANY BASIS. 2.5.4. IN ADDITION TO THE ABOVE, THE LEARNED AO HAS ALLEGE D THAT MR. BHAVESH ACHARYA, AN EMPLOYEE OF THE COMPANY WAS PAID HIGHER SALARY T O COMPENSATE FOR LOSSES INCURRED IN INVESTMENT MADE IN THE APPELLANT COMPANY. THE APPEL LANT COMPANY HAD APPOINTED MR. BHAVESH ACHARYA AS SENIOR DIRECTOR - PROJECT SOLUTI ONS ONLY ON 4 AUGUST 2012 AND HENCE, THERE WAS NO INCREASE IN SALARY AS COMPARED TO EARLIER YEAR, AS HE WAS NOT AT ALL EMPLOYED IN FY 2011-12. HENCE, THERE IS NO QUESTION OF ANY COMPENSATION BEING PAID TO HIM FOR LOSS IN HIS INVESTMENT VALUE. ACCORDINGLY, IT SEEMS THAT THERE IS SOME MISUNDERSTANDING WHILE REPLYING TO QUESTION NO. 7 R ECORDED BY LEARNED AO UNDER SECTION 131 OF THE ACT. COPY OF STATEMENT OF MR. BHAVESH AC HARYA RECORDED UNDER SECTION 131 OF THE ACT IS ENCLOSED AS ANNEXURE 9. FURTHER, THE SAL ARY PAID TO . HIM WAS THE SAME AS AGREED IN THE EMPLOYMENT CONTRACT WHICH IS ATTACHED AS ANNEXURE 10 FOR YOUR READY REFERENCE. THUS, THE OBSERVATION OF THE AO THAT MR. BHAVESH ACHARYA WAS COMPENSATED FOR FALL IN INVESTMENT VALUE IS INCORRECT AND WITHO UT ANY BASIS. 2.5.5. THE APPELLANT HAS FURTHER SUBMITTED THAT THERE IS N O DISPUTE WITH REGARDS TO RENDERING OF SUCH SERVICES; THE APPELLANT SUBMITS T HAT REASONABLENESS OF EMPLOYEE EXPENSES IS NOT RELEVANT FOR CLAIMING DEDUCTION OF EXPENSES UNDER SECTION 37(1). FURTHER, IT IS ALSO SUBMITTED THAT THE COMMERCIAL EXPEDIENCY / BUSINESS RATIONALE OF A PARTICULAR EXPENDITURE INCURRED BY THE APPELLANT FOR SMOOTH FU NCTIONING AND FURTHERANCE OF ITS BUSINESS IS ITS PREROGATIVE. HENCE, NO DISALLOWANCE UNDER SECTION 37(1) OF THE ACT SHOULD BE MADE MERELY ON THE BASIS THAT EXPENSES IS FOUND TO BE UNREASONABLE OR EXCESSIVE. IN THIS REGARDS, THE APPELLANT HUMBLY SUBMITS THAT THE ABOVE EXPENSE HAVE BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE APPEL LANT'S BUSINESS AND THE LEARNED AO HAS NOWHERE CONTENDED THAT THESE EXPENSES WERE NOT UNDERTAKEN FOR THE PURPOSE OF ITS BUSINESS. IN THIS REGARDS, APPELLANT SUBMITS THAT H ON'BLE SUPREME COURT IN THE CASE OF SASSOON J DAVID AND CO (P) LTD V CIT (118 ITR 261)HELD THAT AS LONG AS ASSESSES HAS INCURRED ANY EXPENDITURE FOR THE PURPOSE OF ITS BUS INESS, IT WOULD BE ALLOWED AS A DEDUCTION EVEN IF THERE WAS NO COMPELLING NECESSITY TO INCUR SUCH EXPENSES. FURTHER, HONBLE SUPREME COURT IN THE CASE OF CIT V MALAYALAM PLANTATIONS LTD (53 ITR 140), HAS EXPLAINED THE CONCEPT 'FOR THE PURPOSE OF BUSIN ESS' AS 'THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' IS WIDER IN SCOPE THAN THE EXP RESSION 'FOR THE PURPOSE OF EARNING PROFITS'. THE APPELLANT HAS FURTHER SUBMITTED THE J UDICIAL DECISIONS AS SUPRA. 2.5.6. THE APPELLANT HAS MADE FURTHER SUBMISSION DATED 20 TH SEPTEMBER 2016 AND REITERATED THE SAME AS SUBMITTED EARLIER. THE APPEL LANT HAS SUBMITTED ACKNOWLEDGMENT OF RETURN OF INCOME FOR AY 2013-14 OF THE TWO DIRECTOR S, NAMELY HIMANSHU SHAH AND SURESH RAMU AND THE TWO EMPLOYEES, BHAVESH ACHARYA AND LAL IT PAI. IT IS EVIDENT FROM THE SAME THAT ALL THE EMPLOYEES/DIRECTORS HAVE PAID TAXES IN THE HIGHEST TAX BRACKET OF 30 PERCENT. THIS SUBSTANTIATES THAT BOTH APPELLANT COMPANY AS W ELL AS ITS DIRECTORS AND EMPLOYEES WERE ASSESSED TO TAX AT THE HIGHEST RATE OF 30% AND HENCE, THIS ENTIRE ISSUE IS REVENUE NEUTRAL IN THIS REGARD, APPELLANT HAS SUBMITTED THA T THE JURISDICTIONAL HON'BLE GUJARAT - 14 - ITA NOS.3133/AHD/2016 DCIT VS. CYTESPACE RESEARCH PVT. LTD. ASST.YEAR 2013-14 HIGH COURT IN THE CASE OF PWS ENGINEERS LIMITED VS DCIT (TAX APPEAL NO. 209 OF 2015) HAS HELD THAT WHERE REMUNERATION WAS TAXED IN THE H ANDS OF DIRECTOR AT THE SAME RATE AT WHICH IT WOULD HAVE BEEN TAXED IN THE HANDS OF THE COMPANY, THE SAME WOULD BE REVENUE NEUTRAL. HENCE, DISALLOWING THE REMUNERATIO N TO BE EXCESSIVE IN THE HANDS OF THE COMPANY, WOULD AMOUNT TO DOUBLE TAXATION WHICH IS N OT POSSIBLE. ACCORDINGLY, HON'BLE HIGH COURT ALLOWED THE APPEAL OF THE COMPANY. 2.6. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE, THE ASSESSMENT ORDER AND THE WRITTEN SUBMISSIONS OF THE APPELLANT. THE APPELLANT HAS CONTENDED THAT IT WAS INCORPORATED ONLY ON 11 MARCH 2011 AND SINCE AY 201 2-13 WAS THE FIRST YEAR OF OPERATION AND ACCORDINGLY, SALARY PAYMENTS CONSISTE D OF EMPLOYEES WHICH WERE EMPLOYED ONLY FOR PART OF THE YEAR. HOWEVER, ALL TH ESE EMPLOYEES WERE EMPLOYED FOR FULL YEAR IN AY 2013-14. AS PER THE WORKING SUBMITTED BY THE APPELLANT, MAJORITY OF EMPLOYEES WERE EMPLOYED IN AY 2012-13 FOR ONLY PART OF THE YEAR. ACCORDINGLY, IF THEIR SALARY IS COMPUTED FOR 12 MONTHS, SALARY EXPENSES W OULD BE RS. 5,90,34,991/- AS AGAINST ACTUAL SALARY EXPENSES OF RS. 5,56,89,030/- INCURRE D IN AY 2013-14. IN FACT ON AN ANNUALIZED BASIS, THE SALARY HAS REDUCED BY 5.6%. T HUS, THE CONTENTION OF THE AO THAT THERE WAS AN INCREASE IN SALARY EXPENSES IN AY 2013 -14 IS FACTUALLY INCORRECT. 2.6.1. FURTHER, AS PER THE SIGNED FINANCIAL STATEMENTS SUB MITTED BY THE APPELLANT, THE TURNOVER OF THE APPELLANT, HAS INCREASED BY ALMOST 27 PERCENT FROM RS, 4,10,44,812/- IN AY 2012-13 TO RS. 5,21,24,174/- IN AY 2013-14. THER EFORE, THE CONTENTION OF THE AO THAT THERE IS A SHARP INCREASE IN SALARY EXPENSES WHEREA S THE TURNOVER HAS DECREASED IS FACTUALLY INCORRECT. AS REGARDS INCREASE IN SALARY PAID TO THE TWO DIRECTORS NAMELY HIMANSHU SHAH AND SURESH RAMU IN AY 2013-14, IT IS AGAIN OBSERVED THAT BOTH OF THEM WERE ONLY EMPLOYED FOR 6 MONTHS IN AY 2012-13 WHERE AS THEY WERE EMPLOYED FOR THE FULL PART IN AY 2013-14. AS PER THE EMPLOYMENT CONTRACT SIGNED BETWEEN THE APPELLANT COMPANY AND SURESH RAMU AND HIMANSHU SHAH, IT IS OB SERVED THAT THEY WERE BOTH APPOINTED ON 1 OCTOBER, 2011. HENCE, THEIR SALARY I N AY 202-13 WAS ONLY FOR 6 MONTHS WHEREAS IN AY 2013-14, THEY WERE EMPLOYED FOR A COM PLETE PERIOD OF 12 MONTHS. HENCE, THERE IS NO ACTUAL INCREASE IN THE SALARY PAID TO T HEM IN AY 2013-14. 2.6.2. SIMILARLY, IN THE CASE OF SHRI BHAVESH ACHARYA BASE D ON STATEMENT RECORDED U/S 131, THE AO OBSERVED THAT HE WAS PAID SALARY HIGHER TO COMPENSATE FOR THE LOSSES INCURRED TO HIM DUE TO INVESTMENT MADE IN THE COMPA NY. THE APPELLANT SUBMITTED THE EMPLOYMENT CONTRACT ENTERED WITH SHRI BHAVESH ACHAR YA WHICH SHOWS THAT HE WAS ONLY EMPLOYED ON 4 AUGUST 2012 (AY 2013-14), THEREFORE, THE QUESTION OF INCREASE IN SALARY IN AY 2013-14 AS COMPARED TO THE SALARY PAID IN AY 201 2-13 DOES NOT ARISE. ACCORDINGLY, THE STATEMENT OF MR. BHAVESH ACHARYA RECORDED BY TH E AO U/S 131 THAT HE WAS COMPENSATED FOR LOSS OF INVESTMENT MAY BE FACTUALLY INCORRECT AS MR. BHAVESH ACHARYA WAS EMPLOYED FOR THE FIRST TIME ONLY IN AY 2013-14. FURTHER, WITH REGARDS TO THE JOINING BONUS OF RS. 65,00,000/- PAID TO SHRI LALIT PAL, IT IS EVIDENT THAT HE HAS RICH QUALIFICATION AND EXPERIENCE. THE AMOUNT PAID TO HIM WAS AS PER T HE EMPLOYMENT CONTRACT AND IT IS NOT OPEN FOR THE AO TO QUESTION THE COMMERCIAL EXPEDIEN CY OF A BUSINESSMAN. - 15 - ITA NOS.3133/AHD/2016 DCIT VS. CYTESPACE RESEARCH PVT. LTD. ASST.YEAR 2013-14 2.6.3. ON A CAREFUL EXAMINATION OF THE ENTIRE FACTS OF THE CASE, IT IS NOTED THAT THE AO HAS NOWHERE DISPUTED THAT THE EMPLOYEES/DIRECTORS HAVE NOT RENDERED ANY SERVICES TO THE APPELLANT COMPANY. HENCE, THERE IS NO DISPUTE ON FA CTUM OF SERVICES RENDERED BY DIRECTORS/EMPLOYEES. FURTHER, THE AO HAS NOT DISALL OWED ANY EXPENSES U/S 40A(2)(B) OF THE ACT. IT IS A SETTLED LAW THAT THE REASONABLENES S OF EMPLOYEE EXPENSES IS NOT RELEVANT TO CLAIMING DEDUCTION OF EXPENSES UNDER SECTION 37(1) OF THE IT ACT. ADDITIONALLY, THE COMMERCIAL EXPEDIENCY / BUSINESS RATIONALE OF A PAR TICULAR EXPENDITURE INCURRED BY AN ASSESSEE FOR THE SMOOTH FUNCTIONING AND FURTHERANCE OF ITS BUSINESS IS ITS PREROGATIVE AND HENCE, THE SAME CANNOT BE QUESTIONED BY THE AO. FUR THER, I FIND THAT IN FOLLOWING JUDICIAL PRECEDENTS, HON'BLE SUPREME COURT HAS SPECIFICALLY HELD THAT IT IS FOR THE ASSESSEE TO DECIDE WHICH EXPENDITURE HAS TO BE INCURRED IN ITS BUSINESS AND THE SAME CANNOT BE DECIDED BY THE AO. SASSOON J DAVID AND CO (P) LTD V CIT (118 ITR 261), OBSERVED AS FOLLOWS: 'IT HAS TO BE OBSERVED HERE THAT THE EXPRESSION 'WH OLLY AND EXCLUSIVELY' USED IN S. 10(2)(XV) OF THE ACT DOES NOT MEAN ' NECESSARILY'. ORDINARILY, IT IS FOR THE ASSESSEE TO DECIDE WHETHER ANY EXPENDITURE SHOULD BE INCURRE D IN THE COURSE OF HIS OR ITS BUSINESS. SUCH EXPENDITURE MAY BE INCURRED VOLUNTAR ILY AND WITHOUT ANY NECESSITY AND IF IT IS INCURRED FOR PROMOTING THE BUSINESS AN D TO EARN PROFITS, THE ASSESSEE CAN CLAIM DEDUCTION UNDER S. 10(2)(XV) OF THE ACT E VEN THOUGH THERE WAS NO COMPELLING NECESSITY TO INCUR SUCH EXPENDITURE.' IN THE CASE OF CIT V DHANRAJGIRJI RAJA NARASINGIRJI (91 ITR 544) (SC), THE HON'BLE SUPREME COURT HAS HELD AS FOLLOWS: 'IT IS NOT OPEN TO THE DEPARTMENT TO PRESCRIBE WHAT EXPENDITURE AN ASSESSEE SHOULD INCUR AND IN WHAT CIRCUMSTANCES HE SHOULD IN CUR THAT EXPENDITURE. EVERY BUSINESSMAN KNOWS HIS INTEREST BEST.' SIMILARLY, THERE ARE ALSO SEVERAL HIGH COURT JUDGME NTS WHICH HAVE FOLLOWED THE ABOVE SUPREME COURT RULINGS AND HELD THAT COMMERCIAL EXPE DIENCY OF EXPENDITURE CANNOT BE QUESTIONED. THEREFORE, BASED ON THE ABOVE JUDICIAL PRECEDENTS AND FACTS OF THE CASE, IT CAN BE OBSERVED THAT IT IS NOT FOR THE AO TO QUESTI ON THE COMMERCIAL EXPEDIENCY OF A CERTAIN EXPENDITURE INCURRED BY THE APPELLANT. THER EFORE, SALARY EXPENSES INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS SHOULD BE ALLOWABLE AS A DEDUCTION U/S 37(1) OF THE ACT. 2.6.4. ADDITIONALLY, THE APPELLANT HAS SUBMITTED ACKNOWLED GMENT OF RETURN OF INCOME FOR AY 2013-14 OF THE TWO DIRECTORS, NAMELY HIMANSHU SH AH AND SURESH RAMU AND THE TWO EMPLOYEES, BHAVESH ACHARYA AND LALIT PAL. IT IS EVI DENT FROM THE SAME THAT ALL THE EMPLOYEES/DIRECTORS HAVE PAID TAXES IN THE HIGHEST TAX BRACKET OF 30 PERCENT. THIS SUBSTANTIATES THAT BOTH APPELLANT COMPANY AS WELL A S ITS DIRECTORS AND EMPLOYEES WERE ASSESSED TO TAX AT THE HIGHEST RATE OF 30% AND HENC E, THIS ENTIRE ISSUE IS REVENUE NEUTRAL. ACCORDINGLY, EVEN ON THE GROUNDS OF REVENUE NEUTRALITY, DISALLOW ING THE INCOME IN HANDS - 16 - ITA NOS.3133/AHD/2016 DCIT VS. CYTESPACE RESEARCH PVT. LTD. ASST.YEAR 2013-14 OF THE APPELLANT COMPANY WHEN IT WAS ALREADY TAXED IN THE HANDS OF DIRECTORS AND EMPLOYEES WOULD TANTAMOUNT TO DOUBLE TAXATION. FURTHER, APPELLANT'S CASE IS ALSO COVERED BY JUDGME NT OF JURISDICTIONAL HON'BLE GUJARAT HIGH COURT IN THE CASE PWS ENGINEERS LIMITED V/S DCIT (TAX APPEAL NO. 209 OF 2015) WHEREIN IT WAS HELD ON GROUNDS OF REVENUE NEUTRALIT Y IF ONCE THE INCOME IS BEING CHARGED IN THE HANDS OF THE DIRECTORS IN THE HIGHEST TAX BR ACKET, TAXING THE SAME IN THE HANDS OF THE COMPANY WOULD AMOUNT TO DOUBLE TAXATION. HENCE, BASED ON THE FACTS OF THE CASE AND THE VARIOUS JUDICIAL PRECEDENTS CITED BY THE APPELL ANT, I FIND THAT THE AO WAS INCORRECT IN DISALLOWING EMPLOYEE BENEFIT EXPENSES AMOUNTING TO RS.3,41,72,205/- AND THE SAME SHOULD BE ALLOWED U/S 37(1) OF THE ACT. THE A.O. IS DIRECTED TO GIVE RELIEF ACCORDINGLY. THE GROUND OF THE APPEAL IS ALLOWED. WE FIND THAT THE APPELLANT JUSTIFIED THAT THE TURNO VER OF THE APPELLANT HAS INCREASED BY AN AMOUNT OF RS.1,10,79,362/- OVER THE PREVIOUS YEAR WHICH HAS BEEN VERIFIED FROM THE FINANCIAL STATEMENT BY THE LEARNED CIT(A). SO F AR AS THE INCREASE OF THE SALARY OF THE EMPLOYEES NAMELY HIMANSHU SHAH BEING THE CHIEF FINA NCIAL OFFICER, MR. SURESH RAMU BEING THE CHIEF EXECUTIVE OFFICER THE ASSESSEE HAS BEEN ABLE TO SHOW THAT BOTH THE EMPLOYEES WERE PAID SALARY ONLY FOR A PART OF F.Y. 2011-12 WHEREAS THEY WERE EMPLOYED FOR FULL PART OF F.Y. 2012-13. THE PAYMENT MADE TO SHRI LALTI PAI TO THE TUNE OF RS.65,00,000/- HAS ALSO BEEN JUSTIFIED BY THE ASSES SEE TAKING INTO CONSIDERATION HIS ACADEMIC BACKGROUND AND IMMENSE EXPERIENCE IN THIS FIELD. THE PAYMENT MADE TO BHAVESH ACHARAY HAVING 19 YEARS OF EXPERIENCE IN CL INICAL DATA MANAGEMENT AND 4 YEARS IN SITE MANAGEMENT WAS ALSO EXPLAINED BY THE ASSESS EE RELYING UPON HIS RICH QUALIFICATIONS AND EXPERIENCE. ALL THIS DOUBTS/POIN TS RAISED BY THE LEARNED AO WERE CAREFULLY CONSIDERED BY THE LEARNED CIT(A) WHILE DE LETING ADDITION MADE BY THE LEARNED AO. WE HAVE ALSO CAREFULLY CONSIDERED THE JUDGMENT RELI ED UPON BY THE LEARNED AR. WE FIND FROM THE JUDGMENT PASSED BY THE HONBLE APE X COURT IN THE MATTER OF SASSOON J. DAVID AND CO (P) LTD.-VS-CIT REPORTED IN 118 ITR 26 1, THAT REASONABLENESS OF EMPLOYEES EXPENSES IS NOT RELEVANT TO CLAIMING DED UCTION OF EXPENSES UNDER SECTION 37(1) OF THE ACT. ADDITIONALLY COMMERCIAL EXPEDIENC Y/BUSINESS RATIONAL OF A PARTICULAR - 17 - ITA NOS.3133/AHD/2016 DCIT VS. CYTESPACE RESEARCH PVT. LTD. ASST.YEAR 2013-14 EXPENDITURE INCURRED BY AN ASSESSEE FOR THE SMOOTH RUNNING AND FURTHERANCE OF ITS BUSINESS IS ITS PREROGATIVE AND HENCE THE SAME CANN OT BE QUESTIONED BY THE REVENUE. THE QUESTION REGARDING TAX REVENUE NEUTRALITY ON THE FA CT THAT IF THE INCOME IS BEING CHARGED IN THE HANDS OF THE DIRECTORS IN THE HIGHEST RATE B RACKET TAXING THE SAME IN THE HANDS OF THE COMPANY WOULD AMOUNT TO DOUBLE TAXATION AS HAS BEEN DECIDED IN THE JUDGMENT OF PWS ENGINEERS LTD.-VS-DCIT IN TAX APPEAL NO.209 OF 2015 PASSED BY THE JURISDICTIONAL HIGH COURT HAS BEEN DULY TAKEN CARE OF BY THE FIRST APPELLATE AUTHORITY. HENCE TAKING INTO CONSIDERATION THE ENTIRE ASPECT OF THE MATTER, WE F IND NO INFIRMITY IN THE ORDER PASSED BY THE LEARNED CIT(A) IN DELETING THE ADDITION APPLYIN G THE RATIO LAID DOWN BY THE JURIDICAL PRONOUNCEMENT AS MENTIONED ABOVE SO AS TO WARRANT I NTERFERENCE. THUS, THE QUESTION IS ACCORDINGLY ANSWERED IN THE AFFIRMATIVE I.E. IN FAV OUR OF THE ASSESSEE AND AGAINST THE REVENUE. CONSEQUENTLY, THE APPEAL FAILS AND IS ACCO RDINGLY DISMISSED. 6. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSE D. THIS ORDER PRONOUNCED IN OPEN COURT ON 30/07/2019 SD/- SD/- (WASEEM AHMED) ( MS. MADHUMITA ROY) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD; DATED 30/07/2019 PRITI YADAV, SR.PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. () / THE CIT(A)-1, AHMEDABAD. 5. , ! ' , #$%% / DR, ITAT, AHMEDABAD 6. &' () / GUARD FILE. / BY ORDER, //TRUE COPY// / ( DY./ASSTT.REGISTRAR) !, #$ / ITAT, AHMEDABAD