The Dy. CIT., Anand Circle, Anand V. M/s. PWS Engineering Pvt. Ltd., Anand

ITA 520/AHD/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 8231 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 2 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 02-03-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MAHESH G JIWADE
• Keywords: Business income; Question of law

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD D BENCH (BEFORE SHRI P. K. KEDIA, ACCOUNTANT MEMBER & SHRI MAHAVIR PRASAD, JUDICIAL MEMBER) ITA. NO: 520/AHD/2017 (ASSESSMENT YEAR: 2012-13) THE DEPUTY COMMISSIONER OF INCOME-TAX, ANAND CIRCLE, ANAND V/S M/S. PWS ENGINEERING PVT. LTD., POST BOX NO. 62, ANAND SOJITRA ROAD, ANAND-388001 (APPELLANT) (RESPONDENT) PAN: AABCP6507D APPELLANT BY : SHRI MAHESH G. JIWADE, SR . D.R. RESPONDENT BY : MS. ARTI N. SHAH, A.R. ( )/ ORDER DATE OF HEARING : 31 -05-201 8 DATE OF PRONOUNCEMENT : 31 -05-2018 PER MAHAVIR PRASAD, JUDICIAL MEMBER 1. THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A)-4, VADODARA DATED 13.10.2016 PERTAINING TO A.Y. 2012-1 3 AND FOLLOWING GROUNDS HAVE BEEN TAKEN: ITA NO. 520/ AHD/2017 . A.Y. 2012-1 3 2 1. ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. C.I.T. (A) ERRED IN DELEING THE DISALLOWANCE MADE ON ACCOUNT O F REMUNERATION AND INCENTIVE TO DIRECTORS WITHOUT APPRECIATING THAT THE DISALLOWANC E MADE BY THE A.O. WAS IN ACCORDANCE WITH THE PROVISION OF SECTION 40A(2) OF THE ACT AND THAT NOWHERE IN SECTION 40A(2) OF ;THE ACT IT IS MENTIONED THAT IF THE DIRECTORS HAVE PAID TAX ON EXCESS REMUNERATION, DISALLOWANCE U/S. 40A(2) OF TH E ACT WILL NOT BE ATTRACTED IN THE HANDS OF ASSESSEE COMPANY. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. C.I.T. (A) ERRED IN HOLDING THAT 'ASSESSING OFFICER HAS NOT ES TABLISHED THAT THE PAYMENTS TO THE DIRECTORS ARE EXCESSIVE OR UNREASONABLE' IGNORING T HE FACTUAL FINDING RECORDED BY THE A.O IN THE ASSESSMENT ORDER AND IGNORING THE ASSESS EE'S FAILURE TO FURNISH EVIDENCE TO JUSTIFY THAT THE INCREASE IN SALE FOR THE YEAR UNDE R CONSIDERATION AS ATTRIBUTABLE TO THE EFFORTS OF THE DIRECTORS ONLY AND THAT EXCEPT THE D IRECTORS, NO OTHER STAFF MEMBERS CONTRIBUTED IN INCREASING SALES. 3. THE APPELLANT CRAVES LEAVE TO ADD, TO AMEND OR ALTER THE ABOVE GROUNDS AS MAY BE DEEMED NECESSARY. 2. THE FACTS OF THE CASE ARE ON PERUSAL OF TAX AUDIT R EPORT FOR THE YEAR UNDER CONSIDERATION AND COPY OF ACCOUNTS OF DIRECTORS', I T HAS BEEN FOUND THAT THE ASSESSEE COMPANY PAID REMUNERATION AND INCENTIVES T O DIRECTORS. SUCH EXPENDITURE HAS INCREASED FROM RS 32,40,000/- IN AS STT. YEAR 2011-12 TO RS 1,49,10,000/- IN ASSTT. YEAR 2012-13. THEREFORE, TH E ASSESSEE WAS ASKED TO EXPLAIN THE REASONS AND JUSTIFICATION OF HUGE HIKE IN DIRECTORS' REMUNERATION EXPENSES VIDE ORDER SHEET ENTRY DATED 29/09/2014. I N RESPONSE, THE ASSESSEE VIDE ITS SUBMISSION DATED 07/01/2015 HAS FURNISHED THE EXPLANATION AS UNDER (ONLY RELEVANT PORTION REPRODUCED): 'THE SALARY TO DIRECTORS IS AS UNDER : ITA NO. 520/ AHD/2017 . A.Y. 2012-1 3 3 PARTICULAR 31/03/2012 31/03/2011 (I) TOTAL SALES RS 5, 90,85, 9 3 2/ - RS 3, 50,94,491 / - (II) TOTAL SALARY (A) ANNUAL SALARY (B) COMMISSION ON SALES (23.71% OF SALES RS 9,0 0,000/ - RS 1,40,10,000/- RS 9,00,000/ - RS 84,00,000/- TOTAL RS 1,49,10,000/- RS 93,00,000/- THE SALARY IS PAID ON BASE OF AS STATED ABOVE. TOTAL SALES HAS GONE UP BY RS 2,39,91,435/-. ACCORDINGLY THE SALARY EXPENSES IS ' INCREASED DURING THE YEAR. ' 3. I HAVE CAREFULLY CONSIDERED THE ABOVE SUBMISSION OF THE ASSESSEE COMPANY. THE ONLY CONTENTION FOR RISE IN DIRECTORS' REMUNERATION IS THAT THE SALES DURING THE YEAR HAS GONE UP BY RS. 2,39,91,435/- FROM THE COPY OF ACCOUNTS IT IS NOTICED THAT THE ASSESSEE COMPANY HAS PAID REMUNERATION TO THE DIRECTORS AS UNDER : SR. NO. NAME OF DIRECTOR TOTAL SALARY & INCENTIVE (RS) 1 SHRI DINESHBHAI S. PANCHAL 24,85,000/- 2 SHRI NISHIT D. PANCHAL 24,85,000/- 3 SHRI YOGESHBHAI S. PANCHAL 49,70,000/ - 4 SHRI ROBHITBHAI S. PANCHAL 49,70,000/ - TOTAL 1,49,10,000/ - 4. IT IS PERTINENT TO MENTION HERE THAT SIMILAR ISSUED WAS ALSO IN THE ASSESSMENT YEAR 2010-11 WHEREIN IT WAS NOTICED THAT THE EXPEND ITURE ON ACCOUNT OF DIRECTORS' REMUNERATION INCREASED FROM RS 9 LAKHS I N ASSTT. YEAR 2009-10 TO RS ITA NO. 520/ AHD/2017 . A.Y. 2012-1 3 4 80,30,1787- IN ASSTT. YEAR 2010-11 AND AFTER CONSID ERING SUBMISSION OF THE ASSESSEE IN THIS REGARD AND OVER ALL FACTS OF THE C ASE SUCH INCREASE OF SALES BY ABOUT 3.6 TIMES THAN PRECEDING YEAR, THE DISALLOWAN CE OF RS 71,30,1787-WAS MADE AND ACCORDINGLY THE ADDITION WAS MADE TO THE T OTAL INCOME OF THE ASSESSEE COMPANY. AGAINST THE SAID ADDITION, THE AS SESSEE HAD PREFERRED AN APPEAL BEFORE THE LEARNED COMMISSIONER OF INCOME-TA X (APPEAL), BARODA. THE ACTION OF THE ASSESSING OFFICER IN THIS REGARD WAS CONFIRMED IN APPEAL (VIDE ORDER DATED 19/09/2013). THE ASSESSEE HAD PREFERRED SECOND APPEAL BEFORE THE HON'BLE INCOME-TAX APPELLATE TRIBUNAL, AHMEDABAD. T HE HON'BLE ITAT HELD THAT THE INFERENCE .OF THE LOWER AUTHORITIES CANNOT BE SUSTAINED, ESPECIALLY WHEN IT IS OBSERVED THAT THE ASSESSEE COMPANY'S TURNOVER HAS INCREASED TO 3.6 TIMES I.E. FROM RS 99,88,414/- TO RS 3,61,38,065/- AND IN THE BACKGROUND OF SUCH INCREASE IN TURNOVER , THE CONTENTION OF THE ASSESS EE THAT THE SAME WAS THE RESULT OF HARD WORK PUT IN BY THE DIRECTORS CANNOT BE RULED OUT. THEREFORE, SOME INCREASE IN REMUNERATION TO DIRECTORS FOR THEI R HARD WORK IS CERTAINLY JUSTIFIED AND REASONABLE. HOWEVER, THE INCREASE IN DIRECTORS' REMUNERATION TO ABOUT 9 TIMES CANNOT BE JUSTIFIED ON THE BASIS OF A BOVE INCREASE IN THE TURNOVER. THEREFORE, THE HON'BLE TRIBUNAL ALLOWED THE DIRECTO RS' REMUNERATION OF 3.6 TIMES OF THE IMMEDIATELY PRECEDING YEAR WHICH WORKE D OUT TO RS 32,40,000/- AND CONFIRMED THE BALANCE DISALLOWANCE OF DIRECTORS ' REMUNERATION OF RS 47,90,178/-. 5. FOR THE YEAR UNDER CONSIDERATION, IT IS TRUE THAT T HE SALES HAVE INCREASED FROM RS 3,20,77,040/- IN THE A.Y 2011-12 TO RS 5,74,12,6 14/- IN THE CURRENT ASSESSMENT YEAR. HOWEVER, THE HUGE HIKE IN DIRECTOR S' REMUNERATION IS UNREASONABLE AND UNJUSTIFIED. THE ASSESSEE'S CONTEN TION IS THAT THE HIKE IN REMUNERATION IS GIVEN BECAUSE OF RISE IN SALES. BUT NO ANY EVIDENCES ARE ITA NO. 520/ AHD/2017 . A.Y. 2012-1 3 5 FURNISHED AS TO SUBSTANTIATE AND JUSTIFY THAT THE R AISE IN SALE IS ATTRIBUTABLE TO THE EFFORTS OF THE DIRECTORS ONLY. THE MUCH LESSER REMU NERATION PAID TO THE DIRECTORS IN THE EARLIER YEARS WAS NOT CONSIDERED A S INADEQUATE BY THE ASSESSEE COMPANY. THEREFORE, GIVING HUGE RISE IN THE DIRECTO RS' REMUNERATION ONLY BECAUSE OF INCREASE IN SALES CANNOT BE HELD TO BE J USTIFIED AND REASONABLE. THE ASSESSEE'S CLAIM IS NOT SUPPORTED BY ANY MATERIAL E VIDENCE TO SUBSTANTIATE THAT ONLY THE DIRECTORS WERE CONTRIBUTORS IN INCREASING SALES AND NOT OTHER STAFF AND EMPLOYEES. FURTHER, IT IS ALSO NOT PROVED BY THE AS SESSEE THAT SUCH INCENTIVES WERE GIVEN TO STAFF ALSO. THEREFORE, IT IS HELD THA T THE DIRECTORS' REMUNERATION IS EXCESSIVE, UNREASONABLE AND UNJUSTIFIED BECAUSE THE HUGE RISE IN DIRECTORS' REMUNERATION WAS NOT FOUND TO BE WHOLLY AND EXCLUSI VELY FOR/ THE PURPOSE OF THE ASSESSEE'S BUSINESS AND THAT TOO ONLY BECAUSE O F DIRECTORS' EFFORTS OR CONTRIBUTIONS IN INCREASING SALES. 6. IN VIEWS OF ABOVE DISCUSSION AND ALSO CONSIDERATION OVER ALL FACTS AND CIRCUMSTANCES OF THE CASE, I HOLD THAT THE DIRECTOR S' REMUNERATION PAID IN EXCESS OF RS 55.08.000/- (CONSIDERING RISE IN SALES AND KEEPING IN MIND THE DECISION OF HON'BLE IT AT IN THE CASE OF ASSESSEE F OR ASSTT. YEAR 2010-11) IS EXCESSIVE, UNREASONABLE AND UNJUSTIFIED AND ACCORDI NGLY DISALLOWANCE OF RS 94,02,000/- OUT OF DIRECTORS' REMUNERATION IS MADE AND THE SAME IS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 7. AGAINST THE SAID ADDITION, ASSESSEE PREFERRED FIRST STATUTORY APPEAL BEFORE THE LD. CIT(A) WHO ALLOWED THE CLAIM OF THE ASSESSEE. 8. NOW DEPARTMENT HAS COME IN APPEAL BEFORE US. ITA NO. 520/ AHD/2017 . A.Y. 2012-1 3 6 9. WE HAVE GONE THROUGH THE RELEVANT RECORD IN THE IMP UGNED ORDER. THE LD. A.R. CONTENTION WAS THAT COMPANY AND THE DIRECTORS OF TH E FIRM WHO ARE BENEFICIARIES ARE PAYING INCOME TAX AT THE SAME RAT E AT WHICH COMPANY IS PAYING TAX AND THIS CONTENTION WAS ALSO UPHELD BY T HE JURISDICTIONAL HIGH COURT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2010-11 IN TAX APPEAL NO. 209 OF 2015 AND FOLLOWING QUESTION OF LAW WAS FRAMED BY TH E HONBLE HIGH COURT WHICH IS REPRODUCED AS UNDER AND HONBLE HIGH COURT AFFIRMATIVELY DECIDED THE MATTER IN FAVOUR OF ASSESSEE WHICH IS REPRODUCE D AS UNDER:- 6. WE HAVE HEARD LEARNED COUNSEL FOR THE PARTIES. THE QUESTION OF APPLICABILITY OF SECTION40A(2) OF THE ACT TO THE RESTRICTED DISALLOW ANCE OF RS. 47,90,178/- IS ALREADY CONCLUDED BY THIS COURT BY THE SAID ORDER D ATED 31.3.2015. WE MAY THEREFORE, PROCEED ON THAT BASIS. DESPITE THIS, THE QUESTION THAT STILL SURVIVES IS WHETHER THE REVENUE CAN TAX THE SAME INCOME IN THE HANDS OF THE COMPANY ON WHICH THE DIRECTORS HAD ALREADY PAID THE TAX AT THE SAME RATE AT WHICH THE COMPANY WOULD HAVE BEEN LIABLE TO BE ASSESSED. IN T HIS CONTEXT, WE MAY RECALL THAT CONSISTENTLY BEFORE ASSESSING OFFICER, CIT(APP EALS) AND TRIBUNAL, THE ASSESSEE HAD CANVASSED THAT ALL THE FOUR DIRECTORS WHO HAD RECEIVED SUCH REMUNERATION, WERE TAXED IN THE HIGHEST BRACKET OF 30%; AT THE SAME RATE AT WHICH THE ASSESSEE COMPANY AT THE RELEVANT TIME WAS ASSESSED. IN FACT, THE ASSESSEE HAD DEMONSTRATED BEFORE CIT(APPEALS) THAT THE TAX LIABILITY OF THE COMPANY ON SUCH DISPUTED REMUNERATION AMOUNT WAS EX ACTLY 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 ANY DISPUTE. WE MAY THEREFORE, PROCEED ON THE BASIS THAT THE ELEMENT OF EXCESSIVE REMUNERATION RE PRESENTS 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 DISTRIBUTED; WOUL D HAVE BEEN TAXED IN THE HANDS OF THE COMPANY. IN THAT VIEW OF THE MATTER, THE QUE STION OF REVENUE NEUTRALITY WOULD IMMEDIATELY ARISE. A CERTAIN INCOME HAS ALREA DY BEEN TAXED IN THE HANDS OF THE DIRECTORS. PERMITTING THE REVENUE TO TAX THE SAME INCOME AGAIN AT THE ITA NO. 520/ AHD/2017 . A.Y. 2012-1 3 7 SAME RATE IN THE HANDS OF THE PRINCIPAL PAYER 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. 10. IN SUPPORT OF ITS CONTENTION, LD. A.R. ALSO FILED I NDIVIDUAL TAX RETURN OF ALL THE DIRECTORS WHICH ALSO SUBSTANTIATE CLAIM OF THE ASSE SSEE. IN VIEW OF THE FOREGOING DISCUSSION AND RESPECTFULLY FOLLOWING THE DECISION OF THE JURISDICTIONAL HIGH COURT, WE DISMISS THE APPEAL OF THE REVENUE. 11. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS D ISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 31 - 05- 2018 SD/- SD/- (P. K. KEDIA) (MAHAVIR PRASAD) ACCOUNTANT MEMBER TRUE COPY JUDICIAL MEMBER AHMEDABAD: DATED 31 /05/2018 RAJESH COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHME DABAD