M/s Neobytes Software Solutions Pvt Ltd , Bangalore V. The Deputy Commissioner of Income Tax Circle-5(3)(1), Bangalore

ITA 353/BANG/2017

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 5068 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 8 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-11-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 04-11-2019
• Assessment Year: 2010-2011
• Appeal Filed On: 16-02-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Commercial expediency; Set aside; Capital Gains

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N V VASUDEVAN, VICE PRESIDENT AND S HRI A K GARODIA , ACCOUNTANT MEMBE R ITA NO. 353 /BANG/2017 ASSESSMENT YEAR : 2010 - 11 NEOBYTES SOFTWARE SOLUTIONS PVT. LTD., NO.50, 1 ST MAIN ROAD, 9 TH CROSS, 3 RD PHASE, J P NAGAR, BANGALORE 560 078. P AN: AABCN 5027F VS. THE DEPUTY COMMISSIONER OF INCOME TAX, 5(3)(1), BANGALORE. APP ELLANT RESPONDENT APP ELLANT BY : SHRI PRASHANTH G.S., CA RESPONDENT BY : SHRI SUNIL K U MAR AGA RWAL, ADDL.CIT(DR)(ITAT), BENGALURU DATE O F HEARING : 04 . 1 1 .2019 DATE OF PRONOUNCEMENT : 06 . 1 1 .2019 O R D E R PER N V VASUDEVAN, VICE PRESIDENT THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORD ER DATED 25.11.2016 OF THE CIT(APPEALS)-5, BENGALURU RELATING TO ASSESS MENT YEAR 2010-11. 2. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF SOFTWARE DEVELOPMENT AND IS ELIGIBLE FOR DEDUCTION UNDER SEC TION 10A OF THE INCOME- TAX ACT, 1961 [THE ACT]. FOR THE YEAR UNDER CONSI DERATION THE ASSESSEE HAD FILED RETURN OF INCOME ON 17.09.2010 DECLARING A TOTAL INCOME OF RS.50,27,399, CONSISTING OF BUSINESS INCOME OF RS. 8,09,626 AND SHORT TERM CAPITAL GAINS AS PER SECTION 111A OF THE ACT A T RS. 42,17,773. ITA NO. 353/BANG/2017 PAGE 2 OF 6 3. THE APPELLANT HAD CLAIMED A DEDUCTION OF RS. 7,3 6,48,153 UNDER SECTION 10A OF THE ACT. IN SUPPORT OF THE CLAIM UND ER SECTION 10A OF THE ACT, THE ASSESSEE HAD ALSO PRODUCED FORM 56F DULY CERTIF IED BY THE CHARTERED ACCOUNTANT. 4. THE LEARNED AO PASSED AN ORDER OF ASSESSMENT UND ER SECTION 143 OF THE ACT DATED 31.01.2013 DETERMINING TOTAL INCOM E OF THE APPELLANT AT RS.2,73,86,777 AS AGAINST RS. 50,27,399 AS RETURNED BY THE ASSESSEE THEREBY REDUCING THE DEDUCTION UNDER SECTION 10A BY RS. 2,20,13,607. 5. WHILE ARRIVING AT THE BUSINESS PROFITS FOR COMPU TING DEDUCTION U/S. 10A OF THE ACT, THE ASSESSEE HAD DEBITED TO THE PRO FIT & LOSS ACCOUNT A SUM OF RS. 63,04,700 TOWARDS DIRECTORS' REMUNERATIO N. THE AMOUNT DEBITED IS IN ACCORDANCE WITH LAW AND MORE SO THE COMPANIES ACT, 1956 AS PER WHICH THE REMUNERATION WAS PAID. ACCORDING TO THE A O, THE ASSESSEE HAD DEBITED A SUM OF RS.3,82,62,500 FOR THE AY 2011-12 AS DIRECTORS REMUNERATION WHICH WORKED OUT TO 25% OF TURNOVER FO R THAT ASSESSMENT YEAR. THE AO COMPARED THE REMUNERATION DEBITED FOR THE IMPUGNED ASSESSMENT YEAR WITH THAT OF ASSESSMENT YEAR 2011-1 2 AND HELD THAT THE PERCENTAGE OF REMUNERATION TO THE EXPORT TURNOVER F OR THE IMPUGNED ASSESSMENT YEAR WAS ONLY 6% AS AGAINST 25% FOR ASSE SSMENT YEAR 2011- 12 AND THUS HE ADOPTED 25% AS THE BASIS FOR DECIDIN G THE REMUNERATION FOR THE IMPUGNED ASSESSMENT YEAR. THEREFORE DEDUCTION U /S. 10A WAS ALLOWED LESS BY RS.2,20,13,607. 6. BEFORE THE CIT(APPEALS), THE ASSESSEE SUBMITTED THAT THE AO IS INCORRECT IN DETERMINING THE REMUNERATION OF THE DI RECTOR FOR THE IMPUGNED ASSESSMENT YEAR AT 25% OF TURNOVER BASED ON THE CLA IM IN FUTURE YEAR I.E. ASSESSMENT YEAR 2011-12. THE ASSESSEE SUBMITTED THA T THE DIRECTORS' REMUNERATION IS PAYABLE ONLY AS PER THE DISCRETION OF BOARD OF DIRECTORS OF THE COMPANY AS PER THE PROVISIONS OF COMPANIES ACT, 1956 AND IT IS ITA NO. 353/BANG/2017 PAGE 3 OF 6 SUBMITTED FURTHER THAT THE AO HAS NO ROLE TO PLAY I N DECIDING THE REMUNERATION PAYABLE TO THE DIRECTORS. IT IS SETTLE D POSITION OF LAW THAT COMMERCIAL EXPEDIENCY OF A COMPANY CANNOT BE QUESTI ONED BY THE REVENUE. THE ASSESSING OFFICER CANNOT ASSUME THE AR M CHAIR OF THE ASSESSEE AND DECIDE HOW THE ASSESSEE MUST CONDUCT I TS AFFAIRS. RELIANCE IS PLACED ON THE DECISION OF THE SUPREME COURT IN T HE CASE OF S A BUILDERS LTD VS CIT REPORTED IN 288 ITR 1 (SC). IT WAS SUBMITTED THA T THE ACTION OF THE AO IN TAKING THE AMOUNT DEBITED FOR ASSESSMENT YEAR 2011-12 TOWARDS DIRECTORS' REMUNERATION AS SACROSANCT AND A VALID Y ARDSTICK TO DECIDE THE REMUNERATION PAID IN THE PREVIOUS YEARS' IS A PROCE SS NOT KNOWN TO LAW AND THUS THE ASSESSMENT ORDER NEEDS TO SET ASIDE ON THI S COUNT ALONE IN THE INTEREST OF EQUITY AND JUSTICE. 7. THE CIT(APPEALS), HOWEVER, CONFIRMED THE ORDER O F THE AO. HE NOTED THAT THE ASSESSING OFFICER HAS OBSERVED THAT THE REMUNERATION TO THE DIRECTORS IS NECESSARILY AN IMPORTANT EXPENDITURE B ECAUSE THE DIRECTORS MANAGE THE AFFAIRS OF THE COMPANY AS A WHOLE AND TH ERE IS NO REASON WHY COMMENSURATE REMUNERATION SHOULD NOT BE FACTORED FO R A.Y.2010-11 PARTICULARLY WHEN THE SAME IS CHARGED TO THE P&L AC COUNT FOR A.Y.2011-12. THE APPELLANT BY NOT CHARGING THE COMMENSURATE REMU NERATION HAS DECLARED A HIGHER PROFIT IN THE P&L ACCOUNT FOR A.Y .2010-11 RESULTING IN A CONSEQUENT CLAIM OF HIGHER DEDUCTION U/S.10A. CONSI DERING THE FACTS THAT THE APPELLANT HAS CHARGED 25% OF THE TURNOVER OF TH E COMPANY AS REMUNERATION IN A.Y.2011-12, REMUNERATION FOR A.Y.2 010-11 IS ALSO DETERMINED AT 25% OF THE TURNOVER AMOUNTING TO RS.2 ,79,72,536/-. ACCORDING TO THE CIT(APPEALS), SINCE A SUM OF RS.63 ,04,700/- IS ALREADY DEBITED TOWARDS THE REMUNERATION, THE BALANCE OF RS .2,16,67,837/- IS TREATED AS EXPENDITURE IN THE STPI UNIT AND THE DED UCTION U/S.10A IS RESTRICTED TO RS.5,19,80,317. ITA NO. 353/BANG/2017 PAGE 4 OF 6 8. AGGRIEVED BY THE ORDER OF CIT(APPEALS), THE ASSE SSEE IS IN APPEAL BEFORE THE TRIBUNAL. THE GRIEVANCE OF THE ASSESSEE AGAINST THE DISALLOWANCE OF PART OF DEDUCTION U/S. 10A OF THE A CT IS PROJECTED IN GROUND NOS.2 TO 5 OF THE GROUNDS OF APPEAL. 9. AT THE TIME OF HEARING, IT WAS BROUGHT TO OUR NO TICE BY THE LD. COUNSEL FOR THE ASSESSEE THAT IN AY 2009-10, IDENTICAL DIS ALLOWANCE OF PART OF DEDUCTION U/S. 10A FOR IDENTICAL REASON VIZ., REVI SING THE REMUNERATION OF DIRECTORS CAME UP FOR CONSIDERATION IN ASSESSEES O WN CASE AND THE TRIBUNAL IN ITA NO.1108/BANG/2017 BY ORDER DATED 6. 9.2019 UPHELD THE ORDER OF CIT(APPEALS) DELETING DISALLOWANCE MADE BY THE AO. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRI BUNAL:- 8. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH S IDES IN LIGHT OF RECORDS PLACED BEFORE US. 9. LD.CIT(A) DELETED ADDITION BY OBSERVING AS UND ER: 6. FOR THE SERVICES BY A DIRECTOR, THE REMUNERATIO N PAYABLE HAS TO BE DETERMINED BY THE ARTICLES OF THE COMPANY OR BY A RESOLUTION OR BY A SPECIAL RESOLUTI ON PASSED BY THE COMPANY IN A GENERAL MEETING. IF THE ARTICLES SO REQUIRE. THUS, THE REMUNERATION PAYABLE TO A DIR ECTOR MAY VARY FROM YEAR TO YEAR BASED ON THE ARTICLES OR A RESOLUTION PASSED BY THE COMPANY IN A GENERAL MEETI NG. IT WAS NOT MANDATED UNDER STATUTE THAT REMUNERATION MU ST BE PAID TO THE DIRECTORS. THE AO HAS REFERRED TO TH E FACT OF REMUNERATION PAID IN AY: 2011-12 AND HELD THAT BY N OT DEBITING DIRECTORS REMUNERATION IN THE PROFIT AND LOSS ACCOUNT FOR AY: 2009-10, IT HAD CLAIMED HIGHER DEDU CTION U/S 10A. THE AO HAS HELD, THIS IS AGAINST THE PROVISIONS OF LAW . HOWEVER, AS SEEN ABOVE, THERE IS NO SUCH LEGAL PROVISION WHICH REQUIRED CHARGING OF DIRECTORS REMUNERATION. IT IS SETTLED LAW THAT NO EXPENDITURE COULD BE FORCED ON AN ASSESSEE. THE AO HAS NOT BROUGHT ON RECORD AS TO WHICH SERVICES WERE PROVIDED BY THE DI RECTORS AND FOR WHICH NO REMUNERATION AS PAID SO AS TO ENAB LE THE APPELLANT TO EARN MORE THAN ORDINARY PROFITS. THERE FORE, THE PROVISIONS OF SECTION 80IA(10) AND 10A(7) ARE ALS O NOT ITA NO. 353/BANG/2017 PAGE 5 OF 6 ATTRACTED IN THE PRESENT CASE. UNDER THE CIRCUMSTAN CES, THE DISALLOWANCE OF RS.3,18,86,593/- AS DEDUCTION U NDER SECTION 10A AS MADE BY THE AO ON ACCOUNT OF NON- CHARGING OF DIRECTORS REMUNERATION IS DELETED. THE GROUND NOS.3,4,5,6 & 7 ARE ALLOWED. WE ARE OF CONSIDERED OPINION THAT COMMERCIAL EXPEDI ENCY OF A COMPANY CANNOT BE QUESTIONED BY REVENUE AND DECISIO N TO PAY REMUNERATION TO DIRECTORS OR NOT IS WITHIN THE REAL M OF MANAGEMENT DECISIONS AND LD.AO HAS NO ROLE TO PLAY IN IT. WE THEREFORE DO NOT FIND ANY INFIRMITY IN VIEW OF L D.CIT(A) AND THE SAME IS UPHELD. ACCORDINGLY THIS GROUND RAISED BY REVENUE STANDS DI SMISSED. 10. FOLLOWING THE AFORESAID ORDER OF THE TRIBUNAL, WE DIRECT THE DISALLOWANCE U/S .10A TO BE DELETED. 11. THE OTHER GROUNDS OF APPEAL WERE NOT PRESSED FO R ADJUDICATION. 12. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 6 TH DAY OF NOVEMBER, 2019. SD/- SD/- ( A K GARODIA ) ( N V VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 6 TH NOVEMBER, 2019. / DESAI SMURTHY / ITA NO. 353/BANG/2017 PAGE 6 OF 6 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, I TAT, B ANGALORE. 6. GUARD FIL E BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.