J.K. Packaging (P) Ltd., Ahmedabad V. The Income tax Officer,Ward-2, Ahmedabad

ITA 3414/AHD/2010

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 1770 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-03-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 10-03-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 24-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIMALENDU VERMA
• Keywords: Commercial expediency
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL : SMC BENCH : AHMEDABAD (BEFORE HONBLE SHR I T.K. SHARMA, J.M .) I.T.A. NO. 3414/AHD./2010 ASSESSMENT YEAR : 2007-2008 J. K. PACKAGING (P) LTD., AHMEDABAD -VS- I.T.O., WARD-4(2), AHMEDABAD (PAN : AABCJ 1454B) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI VIMAL DESAI, A.R . RESPONDENT BY : SHRI VIMALENDU VERMA, D .R. O R D E R THIS APPEAL FILED BY THE ASSESSEE IS AGAINST THE O RDER DATED 22.10.2010 PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-VIII, AHMEDABAD FOR THE ASSESSMENT YEAR 2007-2008. 2. THE ONLY GROUND RAISED BY THE ASSESSEE IN THIS A PPEAL IS AS UNDER: THE LEARNED CIT(A) ERRED IN LAW AND ON FACTS IN CO NFIRMING DISALLOWANCE OF RS.1,20,000/- OUT OF THE REMUNERATION PAID TO THE MANAGING DIRECTOR. YOUR APPELLANT SUBMITS THAT SINCE THE ENTIRE REMUNERATION TO THE MANAGING DIRECTOR IS PAID WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, THE SAME SHOULD HAVE BEEN ALLOWED IN FULL. IT IS SUBMITTED THAT BE SO HELD NOW AND THE DISALLOWANCE CONFIRMED BY THE CIT(A) OF RS.1,20,000/- BE DIRECTED TO BE DELETED. 3. BRIEFLY STATED THE FACTS ARE THAT THE ASSESSEE I S A COMPANY ENGAGED IN THE TRADE OF PACKAGING MATERIALS LIKE PLASTIC BAGS AND POUCHES. FOR THE ASSESSMENT YEAR UNDER APPEAL, THE ASSESSEE FILED THE RETURN OF INCOME DECLARING TOTAL INCOME OF RS.1,94,493/- ON 29.10.2007. THE ASSESSING OFFICER FRAMED THE ASSESSMENT UNDER SECTI ON 143(3) OF THE I. T. ACT AT A TOTAL INCOME OF RS.3,33,157/-, INTER ALIA, DISALLOWING THE DIREC TORS REMUNERATION AMOUNTING TO RS.1,20,000/- INVOKING THE PROVISIONS OF SECTION 40A(2)(B) OF THE I.T.ACT, 1961. 2 ITA NO. 3414-AHD-2010 4. ON APPEAL, THE LEARNED COMMISSIONER OF INCOME TA X(APPEALS) CONFIRMED THE SAID DISALLOWANCE FOR THE DETAILED REASONS GIVEN IN PARA 6 OF THE IMPUGNED ORDER, WHICH READS AS UNDER: 6. I HAVE CAREFULLY CONSIDERED THE FINDINGS OF TH E A.O. AS WELL AS THE SUBMISSION OF THE APPELLANT. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE COMPANY HAS INCREASED THE REMUNERATION OF MANAGING DIRECTOR FROM RS.3,00,000 /- TO RS.4,20,000/-. THE APPELLANT WAS ASKED TO JUSTIFY INCREASE IN THE REMUNERATION OF MANAGING DIRECTOR BY THE A O. THE A.O HAS GIVEN THE FINDING THAT THE APPELLANT FAILE D TO FURNISH ANY EXPLANATION FOR JUSTIFICATION FOR INCREASE IN THE REMUNERATION OF THE DIRECTOR/MANAGING DIRECTOR. THE A.O FURTHER MENTIONED IN THE ASSESSMENT ORDER THAT THERE IS MARGINAL INCREASE IN THE TURNOVER AND THE PROFIT OF THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. THE QUANTUM OF MARGINAL INCREASE IN THE TURNOVER AND PROFIT OF THE APPELLANT DOES NOT JUSTIFY ANY INCREASE IN THE REMUNERATION OF THE MANAGING DIREC TOR. DURING THE APPELLATE PROCEEDINGS, THE APPELLANT SUBMITTED THAT THE PROF IT BEFORE TAXATION OF THE COMPANY WAS RS. 3,04,133/- IN THE YEAR UNDER CONSIDERATION AS AGAINST THE PROFIT OF RS. 1,40,786/- DURING THE PRECEDING YEAR. I AM OF THE OPINION T HAT THE QUANTUM OF PROFIT BEFORE TAXATION IS ONLY RS. 3,04,133/- WHICH DOES NOT JUSTIFY THE PAYMENT OF REMUNERATION TO THE EXTENT OF RS. 4,20,000/-TO THE MANAGING DIRECTOR, IT IS A C LOSELY HELD COMPANY AND THE INCREASE IN THE REMUNERATION OF THE MANAGING DIRECTORS SHOULD BE SUPPORTED BY APPROPRIATE INCREASE IN THE TURNOVER AS WELL AS PROFITABILITY OF THE COMPANY. IN VIEW OF THE FACTS MENTIONED ABOVE, I AM OF THE CONSIDERED OPINION TH AT THE INCREASE IN THE REMUNERATION OF THE MANAGING DIRECTOR FROM RS. 3,00,000/- TO RS. 4 ,20,000/- IN THE GIVEN CIRCUMSTANCES IS NOT JUSTIFIED. HENCE THE ADDITION OF RS. 1,20,000 /- MADE BY THE A.O IS CONFIRMED. AS SUCH THIS GROUND OF APPEAL IS DECIDED AGAINST THE APPELLANT. . 5. AGGRIEVED WITH THE ABOVE, THE ASSESSEE IS IN APP EAL BEFORE THE TRIBUNAL. 6. AT THE TIME OF HEARING BEFORE THE TRIBUNAL, ON B EHALF OF THE ASSESSEE, SHRI VIMAL DESAI APPEARED AND CONTENDED THAT IN THE AFORESAID APPEAL , THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) HAS OBSERVED THAT DURING THE YEAR, PRO FIT BEFORE TAXATION WAS RS.3,04,133/- AS COMPARED TO RS.1,40,786/- IN THE EARLIER YEAR. THER EFORE, HE HELD THAT QUANTUM OF PROFIT BEFORE TAXATION DOES NOT JUSTIFY THE PAYMENT OF REMUNERATI ON TO THE EXTENT OF RS.4,20,000/- TO THE M.D. APART FROM THIS, THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) HAS HELD THAT IN CASE OF CLOSELY HELD COMPANY, INCREASE IN REMUNERATION TO M .D. SHOULD BE SUPPORTED BY APPROPRIATE INCREASE IN THE TURNOVER AS WELL AS PROFITABILITY O F THE COMPANY AND ON THAT BASIS ALONE, HE CONFIRMED THE ADDITION OF RS.1,20,000/-. 6.1 THE COUNSEL OF THE ASSESSEE SUBMITTED THAT AS R EMUNERATION TO M.D. IS NOT EXORBITANT IN THE YEAR UNDER CONSIDERATION AND IT IS NOT LINKED W ITH THE PROFITABILITY OF THE ASSESSEE COMPANY. SECONDLY, EVEN IF THE ASSESSEE MAY NOT BE MAKING AN Y PROFIT, THE M.D. IS TO BE REMUNERATED 3 ITA NO. 3414-AHD-2010 FAIRLY FOR HIS EFFORTS AND SERVICES PUT IN BY HIM. THIS FACT HAS NOT BEEN DENIED BY BOTH THE LOWER AUTHORITIES WHEN THEY ARE ALLOWING THE REMUNERATION OF RS.3,20,000/- TO M.D. IF THE CONTENTION OF THE BOTH THE DEPARTMENTAL AUTHORITIES BELOW THAT TH E M.DS REMUNERATION SHOULD BE LINKED TO THE PROFITABILITY OF THE COMPANY IS ACCEPTED, THEN THEY WILL NOT BE ENTITLED TO ANY REMUNERATION IN THE CASE OF THE COMPANY MAKING LOSS. THE COUNSEL OF THE ASSESSEE HUMBLY POINTED OUT THAT THIS CAN NEVER BE THE PROPOSITION OF LAW OR FACTS AS COMMONL Y UNDERSTOOD. 6.2 CONTINUING HIS ARGUMENT, THE COUNSEL OF THE ASS ESSEE SUBMITTED THAT BOTH THE DEPARTMENTAL AUTHORITIES BELOW TRIED TO SIT ON THE JUDGMENT OVER THE POINT OF VIEW OF THE BUSINESSMAN WHEN THE ASSESSEE COMPANY DECIDED TO IN CREASE THE REMUNERATION TO THE M.D. BY RS.1,20,000/- THIS IS AGAINST THE RATIO OF JUDGMENT OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF VOLTAMP TRANSFORMERS PVT. LTD. VS- CIT REP ORTED IN 129 ITR 105. IN THIS JUDGMENT AT PARA 12, THEIR LORDSHIPS OBSERVED AS UNDER: IT IS WELL SETTLED LAW THAT SO FAR AS THE QUESTIONS OF COMMERCIAL EXPEDIENCY AND BUSINESS NEEDS OF AN ORGANIZATION ARE CONCERNED, I T IS NOT THE VIEW POINT OF A REVENUE OFFICER WHICH SHOULD COUNT BUT IT SHOULD BE THE VI EW POINT OF AN ORDINARY BUSINESSMAN DEALING WITH A SITUATION LIKE THE ONE FACED BY THE PARTICULAR ASSESSEE IN QUESTION. IT IS, THEREFORE, FROM THAT PARTICULAR VIEW POINT THAT TH E QUESTION HAS TO BE APPROACHED. THE COUNSEL OF THE ASSESSEE CLARIFIED THAT THE AFOR ESAID CASE BEFORE THE HON'BLE GUJARAT HIGH COURT WAS ALSO UNDER SECTION 40A(2) WHERE THE DEPAR TMENT WANTED TO QUESTION THE DECISION OF THE ASSESSEE TO GIVE COMMISSION TO THE RELATIVES OF THE DIRECTORS, WHERE THE HON'BLE HIGH COURT OBSERVED THAT IN CASE OF COMMERCIAL EXPEDIENCY AND BUSINESS NEEDS OF AN ORGANIZATION, IT WAS NOT THE VIEW POINT OF THE REVENUE OFFICER WHICH SHOULD COUNT BUT IT SHOULD BE THE VIEW POINT OF AN ORDINARY BUSINESSMAN THAT WOULD MATTER. 6.3 IN THE PRESENT CASE, THE COUNSEL OF THE ASSESSE E POINTED OUT THAT THERE IS NO FINDING BY THE LOWER AUTHORITIES AS TO HOW THE REMUNERATION PAID T O M.D. OF RS.4,20,000/- IS EXCESSIVE, COMPARED TO MARKET RATE. IN THE PRESENT DAYS, WHEN THE OFFICERS IN LOWER RANK THAN M.D. ARE GETTING SALARIES MUCH MORE HIGHER THAN RS.4,20,000/ -, IT CANNOT BE SAID THAT SALARY PAID TO M.D. AMOUNTING TO RS.4,20,000/- IS EXCESSIVE OR UNREASON ABLE. HE FURTHER SUBMITTED THAT PROVISIONS CONTAINED IN SECTION 40A(2) CANNOT BE INVOKED UNLES S THE ASSESSING OFFICER RECORDED A FINDING THAT A SALARY PAID IS EXCESSIVE OR UNREASONABLE. 4 ITA NO. 3414-AHD-2010 7. ON THE OTHER HAND, SHRI VIMALENDU VERMA, D.R., A PPEARING ON BEHALF OF THE REVENUE, VEHEMENTLY SUPPORTED THE ORDER OF THE LEARNED COMMI SSIONER OF INCOME TAX(APPEALS). HE POINTED OUT THAT THERE IS NO JUSTIFICATION WHATSOEV ER FOR INCREASING THE SALARY BY RS.1,20,000/-. THEREFORE, THE VIEW TAKEN BY THE LEARNED COMMISSION ER OF INCOME TAX(APPEALS) BE UPHELD. 8. HAVING HEARD BOTH THE SIDES, I HAVE CAREFULLY GO NE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE HON'BLE SUPREME COURT IN THE CASE OF UPP ER INDIA PUBLISHING HOUSE PVT. LTD. VS- CIT REPORTED IN 117 ITR 569 (SC) HELD THAT SECTION 40A(2) CANNOT HAVE ANY APPLICATION, UNLESS IT IS FIRST HELD THAT THE EXPENDITURE WAS EXCESSIVE AN D UNREASONABLE. ADMITTEDLY, NEITHER THE ASSESSING OFFICER NOR THE LEARNED COMMISSIONER OF I NCOME TAX(APPEALS) IN THEIR RESPECTIVE ORDERS MADE AN ATTEMPT TO FIND OUT WHETHER THE SALA RY PAID TO M.D., LOOKING TO THE SERVICES RENDERED BY HIM, IS FAIR AND REASONABLE. THE INCREA SE IN SALARY OF RS.1,20,000/- OF M.D., IN MY OPINION, IS NEITHER EXCESSIVE NOR UNREASONABLE. THE REFORE, ADDITION OF RS.1,20,000/- MADE BY THE ASSESSING OFFICER BY INVOKING THE PROVISIONS CONTAI NED IN SECTION 40A(2) AND CONFIRMED BY THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) IS HERE BY DELETED. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE COURT ON 18.03.20 11. SD/- (T.K. SHARMA) JUDICIAL MEMBER DATED : 18/03/2011 COPY OF THE ORDER IS FORWARDED TO : 1) THE ASSESSEE 2) THE DEPARTMENT. 3) CIT(A.) CONCERNED, 4) CIT CONCERNED, 5) D.R., ITAT, AHMEDABAD. TRUE COPY` BY ORDER DEPUTY REGI STRAR, ITAT, AHMEDABAD TALUKDAR/SR.P.S. 5 ITA NO. 3414-AHD-2010