G.B.Patel Construction Pvt.Ltd., Ahmedabad V. The ACIT.,Circle-4, Ahmedabad

ITA 330/AHD/2010

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 9095 (ITAT-AHMEDABAD)
• Duration Of Justice: 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-02-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 09-02-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 02-02-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NEETU SHAH
• Assessee Lawyers: SN DIVEDIA
• Keywords: Business income; Opportunity of being heard

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH SMC, AHMEDABAD BEFORE SHRI I.S. VERMA, JUDICIAL MEMBER I.T.A. NO.330/AHD/2010 (ASSESSMENT YEAR 2006-07) G.B. PATEL CONSTRUCTION P LTD VS ASSTT.CIT, CIR.4 AVALON, NEAR KARNAVATI CLUB AHMEDABAD S.G. HIGHWAY, AHMEDABAD PAN : AAACK7008D (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SN DIVEDIA RESPONDENT BY: SMT. NEETU SHAH O R D E R IN THIS APPEAL ASSESSEE HAS OBJECTED TO THE ORDER OF CIT(A)-VIII, AHMEDABAD DATED 12-11-2009 FOR THE ASSESSMENT YEAR 2006-07 WHEREBY HE HAS CONFIRMED DISALLOWANCE OF ASSESSEES CLAIM OF DEDUC TION OF EXPENDITURE INCURRED ON ACCOUNT OF REMUNERATION TO THE DIRECTOR, BY WAY OF FOLLOWING GROUNDS: 1.1 THE LD.CIT(A) HAS GRIEVOUSLY ERRED IN LAW AND OR ON FACTS IN CONFIRMING THAT THE APPELLANT WAS NOT ENGAGED IN CA RRYING ON ANY BUSINESS ACTIVITIES DURING THE YEAR UNDER APPEA L. 1.2 THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW, THE LD.CIT(A) SOUGHT NOT TO HAVE CONFIRMED THA T THE APPELLANT WAS NOT ENGAGED IN ANY BUSINESS ACTIVITY, EVEN FINANCING BUSINESS ALSO. 1.3 THE LD.CIT(A) HAS GRIEVOUSLY ERRED IN LAW AND O R ON FACTS IN UPHOLDING THE DISALLOWANCE OF RS.5,20,000 OUT OF DI RECTORS REMUNERATION. 1.4 THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE , THE LD.CIT(A) OUGHT NOT TO HAVE UPHELD THE DISALLOWANCE OF DIRECTORS REMUNERATION OF RS.5,20,000. ITA NO.330/AHD/2010 2 2. PARTIES HAVE BEEN HEARD. THE BRIEF FACTS AS FOU ND AND ARE RELEVANT FOR DISPOSAL OF THIS APPEAL ARE THAT THE ASSESSEE HAD F ILED ITS RETURN OF INCOME ON 14- 11-2006 FOR ASSESSMENT YEAR 2006-07 DECLARING A LOS S OF RS.4,33,528. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER CALLED UPON THE ASSESSEE TO EXPLAIN THAT SINCE THE ASSESSEE HAS NOT CARRIED ON BUSINESS ACTIVITY HOW ITS CLAIM OF DEDUCTION FOR REMUNERATION TO THE DIRECTORS, CLAIM OF DEDUCTION ON ACCOUNT OF ADMINISTRATIVE EXPENSES, ETC MAY BE ALLO WED. THE ASSESSEES CASE BEFORE THE ASSESSING OFFICER WAS THAT (I) THE PAY MENT OF REMUNERATION TO DIRECTOR BEING ON ACCOUNT OF CONTRACTUAL OBLIGATION , THE SAME WAS AN ALLOWABLE DEDUCTION; AND (II) ASSESSEE HAVING BEEN CARRIED ON PROJECT CONSULTANT BUSINESS, WHICH WAS SEPARATE SOURCE OF INCOME OF 31 ST MARCH, 2003 BUT WAS STILL BEING CARRIED ON IN RESPECT PARTIES TO WHOM FINANCE WAS P ROVIDED ON INTEREST, THE ASSESSEE WAS STILL CARRYING ON BUSINESS ACTIVITY AS PROJECT CONSULTANT CHARGES AND, THEREFORE, THE REMUNERATION PAID TO THE DIRECT OR WAS AN ADMISSIBLE EXPENDITURE. THE ASSESSING OFFICER, HOWEVER, WITHO UT COMMENTING AS TO THE ASSESSEES CLAIM OF EXPENDITURE INCURRED ON ACCOUNT OF CONTRACTUAL OBLIGATION DISALLOWED THE PAYMENT MADE TO DIRECTOR AS PER PARA GRAPH 13 OF HIS ORDER WHICH READS AS UNDER: (13) DIRECTORS REMUNERATION: - AS DISCUSSED IN DETAIL IN FOREGOING PARAGRAPHS, IN RESPECT OF CLAIM OF THE DI RECTORS REMUNERATION THE ASSESSEE COMPANY HAS NOT CARRIED O UT ANY BUSINESS ACTIVITY DURING THE FINANCIAL YEAR RELEVAN T TO ASSESSMENT YEAR 2006-07. THE ANNUAL REPORT FOR 2005-06 REVEAL S THAT THE DIRECTORS OF THE COMPANY HAVE NOT REPORTED TO THE S HAREHOLDERS ANY ACTIVITY CARRIED OUT BY THE COMPANY DURING THE FINA NCIAL YEARS. DIRECTORS HAVE ALSO NOT REPORTED ABOUT THE ACTIVITI ES TO BE CARRIED OUT IN COMING YEARS. DURING THE IMMEDIATELY PRECED ING YEAR ALSO THE ASSESSEE COMPANY HAS NOT CARRIED OUT ANY BUSINE SS ACTIVITY. THUS THE COMPANY WAS NOT ENGAGED IN ANY BUSINESS AC TIVITY, IS NOT ENGAGED IN ANY BUSINESS DURING THE FINANCIAL YEAR N OR IT WAS INTENDING TO ENGAGED IN ANY BUSINESS ACTIVITY AS PE R DIRECTORS REPORT. AS DISCUSSED ABOVE SINCE THE ASSESSEE COMP ANY IS HAVING INCOME FROM OTHER SOURCES, THE PROVISIONS CONTAIN ED IN SECTION F-INCOME FROM OTHER SOURCES OF CHAPTER IV DOES NOT AUTHORIZE DEDUCTION ON ACCOUNT OF DIRECTORS REMUNERATION. AC CORDINGLY THE ITA NO.330/AHD/2010 3 CLAIM OF DIRECTORS REMUNERATION IS DISALLOWED. PEN ALTY PROCEEDINGS FOR FURNISHING INACCURATE PARTICULARS OF INCOME ARE HEREBY INITIATED. 3. THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A) AN D AS IS EVIDENT FROM PARAGRAPH 4.1 TO 4.4 HAD MADE THE FOLLOWING SUBMISS ION: (I) THE APPELLANT BEGS TO SUBMIT THAT INITIALLY THE BUSINESS OF THE APPELLANT COMPANY WAS REAL ESTATE DEVELOPMENT AND PROJECT CON SULTANCY CHARGES, CONSTRUCTION CHARGES ETC. WERE RECEIVED UPTO A.Y. 2 003-04. BUT THEREAFTER, THERE WAS RECESSION IN THE REAL ESTATE MARKET UPTO 2006 A ND THE DEVELOPERS WERE HESITANT TO COMMENCE ANY NEW PROJECT. IT WAS A PER IOD WHEN THE REAL ESTATE MARKET WAS SO BAD SHAPE THAT INVESTING IN PURCHASE OF ANY LAND AND DEVELOPMENT INTO COMMERCIAL / RESIDENTIAL COMPLEX W AS A IMPRUDENT VENTURE, INSTEAD IT WAS ADVISABLE TO KEEP THE FUNDS IN HAND AND WAIT FOR THE APPROPRIATE TIME. THIS CAN BE ALSO ILLUSTRATED FROM THE PRESEN T POSITION OF SHARE MARKET WHEREIN THE STOCK BROKERS DO NOT GET ANY BUSINESS D UE TO THE PREVALENT RECESSION AND FEAR PHYSICO WITH THE INVESTORS SO THAT MANY IN VESTMENT COMPANIES HAVE CURTAILED THEIR BUSINESS OR CLOSED OFFICES / FRANCH ISEE. BUT THE SAME DOES NOT MEAN THAT THE STOCK BROKER IS NOT ENGAGED IN THE SA ID ACTIVITY. UNDER THE CIRCUMSTANCES, THE AO WAS NOT JUSTIFIED IN HIS CONC LUSION. THE FINANCIAL FIGURES OF THE ANNUAL ACCOUNTS ARE NOT THE CONCLUSIVE EVIDENCE OF CLOSURE OF BUSINESS BY THE ASSESSEE. THE AO SHOULD HAVE TAKEN INTO ACCOUN T ALL SURROUNDING CIRCUMSTANCES BEFORE CONCLUDING THE SAME. MERELY B ECAUSE THE BUSINESS HAS BECOME DORMANT OR LULL DUE TO ABSENCE OF ACTIVITY, IT DOES NOT MEAN THAT THE BUSINESS HAS BEEN CLOSED BY THE ASSESSEE. THERE MA Y COME THE LULL PERIODS IN THE LIFE SPAN OF THE ASSESSEE. (II) RELIANCE WAS PLACED ON THE FOLLOWING TWO DECIS IONS: CIT V/S BHARAT NIDHI LTD 60 IT4R 520 (PUNJ) UNIVERSAL PLAST LTD V/S CIT 237 ITR 454 (SC) (III) THE APPELLANT WAS ENGAGED IN THE FINANCIAL AC TIVITIES BY WAY OF ADVANCING FUNDS, EITHER BORROWED OR SURPLUS AND WAS EARNING I NTEREST. HOWEVER, THE ACTIVITY ITA NO.330/AHD/2010 4 OF MAKING ADVANCES SHOULD HAVE BEEN TREATED AS BUSI NESS ACTIVITY AND INTEREST INCOME WAS ASSESSABLE AS BUSINESS INCOME. (IV) THOUGH THE CONSTRUCTION ACTIVITY MAY NOT HAVE BEEN CARRIED OUT IN THIS YEAR, THE DIRECTORS HAVE TO ATTEND AND LOOK AFTER T HE ORGANIZATION SO LONG AS OTHER ACTIVITIES ARE CARRIED ON AND THE COMPANY IS NOT WO ULD UP. IT IS A MATTER OF COMMON KNOWLEDGE THAT EVEN IF THE TEXTILE MILLS WER E CLOSED OR THE CO-OPERATIVE BANKS SUSPENDED THE BANKING OPERATIONS, THE STAFF O R ITS DIRECTORS WERE NOT DISCHARGED (THOUGH IT MAY WORK WITH A REDUCED STREN GTH) AND THE EXPENSES RELATING TO THE ORGANIZATION SET UP HAS TO BE BORNE . SECONDLY, THE AO HAS FAILED TO APPRECIATE THAT THE DIRECTORS REMUNERATION IS G OVERNED BY THE AGREEMENT OR ARTICLES OF ASSOCIATION SO THAT UNTIL ANY AMENDMENT IS MADE, IT CANNOT BE DISCONTINUED TO BE PAID TO THEM. IT IS A CONTRACTUA L LIABILITY WHICH COULD BE VARIED BY AN AGREEMENT, EITHER WRITTEN OR ORAL. THIRDLY, THE AO HAS PRESUMED THAT IN VIEW OF ABSENCE OF CONSTRUCTION ACTIVITY, THE SERVI CES OF DIRECTORS WERE NOT REQUIRED. HOWEVER, THE COMPANY SO LONG AS IT SURVI VES, CANNOT WORK WITHOUT DIRECTORS. EVEN THE DECISIONS RELATING TO FINANCIA L MATTGERS IN VIEW OF HUGE INTEREST INCOME OF RS.21.86 LACS RECEIVED BY THE AP PELLANT COMPANY IN THIS YEAR, COULD NOT BE TAKEN IN ABSENCE OF THE DIRECTORS. LA STLY, THE DIRECTORS REMUNERATION HAS ALREADY BEEN ASSESSED IN THE HANDS OF THE DIRECTORS AS EVIDENT FROM THE STATEMENT OF INCOME FOR A.Y. 2006-07 ENCLO SED. THEY WERE PAID REMUNERATION IN THE EARLIER YEARS ALSO AND THE SAME HAS NOT BEEN DISALLOWED SO FAR. THE AO HAS FAILED TO APPRECIATE THAT THE COMM ON PLACE OF BUSINESS HAS NOTHING TO DO WITH THE RENDERING SERVICES BY THE DI RECTORS. THEY MAY NOT HAVE TO GO TO SOME OTHER PLACE BUT THE DECISIONS HAV E TO B E TAKEN BY THEM RELATING TO THE APPELLANT COMPANY. 4. THE CIT(A) CONSIDERED THE ASSESSEES AFORESAID S UBMISSIONS AND UPHELD THE DISALLOWANCE OF REMUNERATION PAID TO THE DIRECT ORS BUT DELETED THE DISALLOWANCE OF ADMINISTRATIVE EXPENSES. THE RELEV ANT PORTION OF THE ORDER CONTAINED AT PARAGRAPH 5.5 TO 5.8 AND 6.2 ARE AS UN DER: ITA NO.330/AHD/2010 5 5.5 I HAVE CONSIDERED THE FACTS AND SUBMISSION OF THE LD.A.R. CAREFULLY. IT IS SEEN THAT DURING THE RELEVANT PER IOD THE APPELLANTS TOTAL RECEIPTS CONSISTED OF FOLLOWING: (I) BANK DIVIDEND RS. 12,612/- (II) INTEREST INCOME RS.21,86,875/- (III) I.T REFUND RS. 16,446/- -------------------- RS.22,03,321/- 5.6 THE AFORESAID WOULD SHOW THAT THE APPELLANT WAS NOT ENGAGED IN ANY BUSINESS ACTIVITY FOR WHICH IT WAS C ONSTITUTED. THE A.O. HAS ANALYZED THE RECEIPT OF THE APPELLANT IN C OMPARISON TO EARLIER FIVE FINANCIAL YEARS ON PAGE 2 OF THE ASSES SMENT ORDER. THIS AMPLY INDICATES THAT THE APPELLANT WAS EARNING INCO ME ONLY FROM OTHER SOURCES NAMELY INTEREST ON DEPOSITS ETC. IT IS ALSO INTERESTING TO NOTE THAT THE APPELLANT HAS EARNED INTEREST ON T HE UNSECURED LOANS FROM DIRECTORS AND SHARE HOLDERS. THEREFORE UNDER THESE CIRCUMSTANCES I DO NOT FIND ANY FORCE IN THE ARGUME NT OF THE LD.A.R THAT THE APPELLANT WAS ENGAGED IN ANY BUSINESS ACTI VITY DURING THE RELEVANT PERIOD. IN THESE CIRCUMSTANCES, EARNING O F INTEREST DISCLOSED BY THE APPELLANT HAS TO BE TAXED UNDER TH E HEAD INCOME FROM OTHER SOURCES. IN THIS REGARD RELIANCE IS PL ACED ON THE DECISION OF HONBLE RAJASTHAN HIGH COURT IN THE CAS E OF CIT V/S RAJASTHAN LAND DEVELOPMENT CORPORATION 211 ITR 597. 5.7 AS REGARDS THE CLAIM OF DIRECTORS REMUNERATION IT IS SEEN THAT THE A.O IN PARA 13 OF THE ASSESSMENT ORDER HAS ANALYSED THE ACTIVITY OF THE APPELLANT IN DETAIL BEFORE DISALLOW ING THE CLAIM FOR REMUNERATION TO THE DIRECTORS. THE RELEVANT EXTRAC TS OF THE A.OS OBSERVATIONS ARE AS UNDER: DIRE3CTORS REMUNERATION:- AS DISCUSSED IN DETAIL IN FOREGOING PARAGRAPHS, IN RESPECT OF CLAIM OF THE DI RECTORS REMUNERATION, THE ASSESSEE COMPANY HAS NOT CARRIED OUT ANY BUSINESS ACTIVITY DURING THE FINANCIAL YEAR RELEVAN T TO A.Y. 2006-07. THE ANNUAL REPORT FOR 2005-06 REVEALS THAT THE DIRE CTORS OF THE COMPANY HAVE NOT REPORTED TO THE SHAREHOLDERS ANY A CTIVITY CARRIED OUT BY THE COMPANY DURING THE FINANCIAL YEARS. DIR ECTORS HAVE ALSO NOT REPORTED ABOUT THE ACTIVITIES TO BE CARRIED OUT IN COMING YEARS. DURING THE IMMEDIATELY PRECEDING YEAR ALSO THE ASSE SSEE COMPANY HAS NOT CARRIED OUT ANY BUSINESS ACTIVITY. THUS TH E COMPANY WAS NOT ENGAGED IN ANY BUSINESS ACTIVITY, IS NOT ENGAGE D IN ANY BUSINESS ACTIVITY DURING THE FINANCIAL YEAR NOT IT WAS INTENDING TO ENGAGED IN ANY BUSINESS ACTIVITY AS PER DIRECTORS REPORT. AS DISCUSSED ABOVE SINCE THE ASSESSEE COMPANY IS HAVIN G INCOME ITA NO.330/AHD/2010 6 FROM OTHER SOURCES, THE PROVISIONS CONTAINED IN SE CTION F-INCOME FROM OTHER SOURCES OF CHAPTER IV DOES NOT AUTHORIZ E DEDUCTION ON ACCOUNT OF DIRECTORS REMUNERATION. ACCORDINGLY THE CLAIM OF DIRECTORS REMUNERATION IS DISALLOWED. PENALTY PROC EEDINGS FOR FURNISHING INACCURATE PARTICULARS OF INCOME ARE HER EBY INITIATED. 5.8 DURING THE APPELLATE PROCEEDINGS, THE LD.A.R HA S NOT CONTROVERTED THE FINDINGS OF THE A.O. AS REFERRED T O ABOVE. FURTHER, ONCE THE INCOME UNDER REFERENCE HAS BEEN ASSESSED U NDER THE HEAD INCOME FROM OTHER SOURCES THE DEDUCTION OUT OF THE SAME HAS TO BE ALLOWED AS PER THE PROVISIONS OF SEC.57 O F THE ACT. THE DIRECTORS REMUNERATION CANNOT BE ALLOWED AS AN EXPE NSE OUT OF SUCH INCOME UNDER THE GIVEN FACTS OF THE CASE. THE REFORE, UNDER THESE CIRCUMSTANCES I DO NOT FIND ANY REASON TO INT ERFERE WITH THE FINDINGS OF THE A.O IN THIS REGARD. IN VIEW OF THI S, THE DISALLOWANCE MADE BY THE A.O IS HEREBY CONFIRMED. 6.2 I HAVE CONSIDERED THE FACTS AND SUBMISSION OF THE LD.A.R CAREFULLY. I HAVE ALSO GONE THROUGH THE DETAILS OF SUCH EXPENSES WHICH HAVE BEEN MENTIONED BY THE A.O ON PAGE 8 OF T HE ASSESSMENT ORDER. THOUGH THE INCOME OF THE APPELLA NT FOR THE RELEVANT PERIOD HAS BEEN TREATED AS INCOME FROM OT HER SOURCES YET THE EXPENSES WHICH ARE LAID OUT WHOLLY AND EXCLUSIV ELY FOR THE PURPOSE OF EARNING SUCH INCOME ARE TO BE ALLOWED IN TERMS OF THE PROVISIONS OF SEC.57(III) OF THE ACT. THEREFORE, U NDER THESE CIRCUMSTANCES THE EXPENSES UNDER REFERENCE ARE REQU IRED TO BE ALLOWED ACCORDINGLY. IN VIEW OF THIS, THE DISALLOWANCE MADE BY THE A.O IS HEREBY DELETED. 5. IT WAS IN VIEW OF THE, THE LEARNED AR IN ADDITIO N TO THE SUBMISSIONS MADE BEFORE THE REVENUE AUTHORITIES, SUBMITTED THAT THE CIT(A) HAS NOT CONSIDERED THE ASSESSEES CASE FROM THE POINT OF VIEW OF CONTRACTU AL OBLIGATION. SO, ACCORDING TO HIM, WHEN THE PAYMENT WAS AS A RESULT OF CONTRAC TUAL OBLIGATION, THERE WAS NO QUESTION OF DISALLOWING THE SAME IRRESPECTIVE OF TH E FACT AS TO WHETHER THE ASSESSEE WAS CARRYING ON ANY BUSINESS OR NOT THOUGH IN THE GIVEN CASE THE COMPANY WAS RUNNING SMOOTHLY AND HAVING LAKHS OF RU PEES AS INCOME FROM OTHER SOURCES. ACCORDING TO HIM, ALL THE DECISIONS RELAT ING TO VARIOUS ACTIVITIES WERE BEING TAKEN BY THE DIRECTORS OVER THE YEARS AND THE REFORE DIRECTORS REMUNERATION WAS LIABLE TO BE ALLOWED. ITA NO.330/AHD/2010 7 6. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, STRONGLY SUPPORTED THE ORDERS OF THE REVENUE AUTHORITIES. 7. AFTER CAREFUL CONSIDERATION OF RIVAL SUBMISSIONS AND THE FACTS OF THE CASE, I AM OF THE OPINION THAT THE CIT(A) HAVING FAILED TO CONSIDER THE ASSESSEES PLEA THAT THE PAYMENT HAD BEEN MADE AS A RESULT OF CONTR ACTUAL OBLIGATION IS LIABLE TO BE SET ASIDE. THEREFORE, KEEPING IN VIEW THE FACTS AND CIRCUMSTANCES OF THE CASE THE ORDER OF THE CIT(A) IS SET ASIDE AND ASSESSEES CLAIM OF DEDUCTION UNDER REFERENCE IS RESTORED BACK TO HIM WITH THE DIRECTIO NS THAT THE ISSUE RELATING ALLOWABILITY OF EXPENDITURE IN RESPECT OF REMUNERAT ION OF DIRECTORS MAY BE DECIDED AFRESH AFTER CONSIDERING THE ASSESSEES PLEA OF CON TRACTUAL OBLIGATION, IN ACCORDANCE WITH LAW AND AFTER ALLOWING THE ASSESSEE AN OPPORTUNITY OF BEING HEARD. 8. IN THE RESULT, THE APPEAL IS ALLOWED, FOR STATIS TICAL PURPOSE. 9. ORDER PRONOUNCED ON THIS 09 TH DAY OF FEBRUARY, 2010. SD/- (I.S. VERMA) JUDICIAL MEMBER AHMEDABAD, DT : 09 TH FEBRUARY, 2010 PK/- COPY TO: 1. THE ASSESSEE 2. THE REVENUE 3. THE CIT(A)-VIII, AHMEDABAD 4. THE CIT,AHMEDABAD II, AHMEDABAD BY ORDER 5. THE DR, SMC BENCH (TRUE COPY) DEPUTY REGISTRAR, ITAT, AHMEDABAD