DCIT 10(2), MUMBAI V. AARVI ENCON P.LTD, MUMBAI

ITA 5347/MUM/2013

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 4320 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 5 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-01-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 14-05-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 01-08-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MOHAMMED RIZWAN
• Assessee Lawyers: DR K SHIVARAM
• Keywords: Reasonable cause

Judgement Text

, ' INCOME TAX APPELLATE TRIBUNAL,MUMBAI- A,BENCH , , BEFORE S/SH. JOGINDER SINGH,JUDICIAL MEMBE R & RAJENDRA,ACCOUNTANT MEMBER /.ITA NO.5347/MUM/2013, /ASSESSMENT YEAR-2010-11 DY. CIT-10-(2) ROOM NO.432, 4 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD MUMBAI-400 020. VS. M/S. AARVI ENCON PVT. LTD. UNIT NO.155, 1 ST FLOOR SHAH & NAHAR INDL. ESTATE(A 1) DHANRAJ MILL COMPOUND SITARAM JADHAV MARG,LOWER PAREL MUMBAI-400 013. PAN:AAACA 3640 H ( / APPELLANT) ( / RESPONDENT) CO NO.235/MUM/2014, /ASSESSMENT YEAR-2010-11 ARISING OUT OF /ITA/5347/MUM/2013, /ASSESSMENT YEAR :2010-11 M/S. AARVI ENCON PVT. LTD. MUMBAI-400 013. VS. DY. CIT-10-(2) MUMBAI-400 020. ( / ASSESSEE ) ( / RESPONDENT) /ASSESSEE BY :DR. K. SHIVARAM / REVENUE BY :SHRI MOHAMMED RIZWAN / DATE OF HEARING : 01-12- 2015 / DATE OF PRONOUNCEMENT : 01.01.2016 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA, AM - CHALLENGING THE ORDER DT.10.05.13 OF CIT(A)-21,MUMB AI,THE ASSESSING OFFICER(AO) HAS FILED THE PRESENT APPEAL AND THE ASSESSEE HAS FILED CROSS -OBJECTION (CO). ASSESSEE-COMPANY,ENGAGED IN THE BUSINESS OF ENGINEE RING CONSULTANCY AND PROVIDING OF MANPOWER,FILED ITS RETURN OF INCOME ON 02.10.2010DE CLARING INCOME AT RS.5.88CRORES.THE AOCOMPLETED THE ASSESSMENT ON27.02.2013,U/S.143(3) OF THE ACT DETERMINING THE INCOME OF THE ASSESSEE AT RS.6.10 CRORES. ITA NO.5347/MUM/2013: 2. EFFECTIVE GROUND OF APPEAL IS ABOUT DELETING THE AD DITION OF RS.1.21 CRORES.DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESS EE HAD PAID COMMISSION, AMOUNTING TO RS.2.42 CRORES TO TWO OF ITS DIRECTORS NAMELY V D S ANGHVI(VDS) AND JAIDEV SANGHAVI (JS). COMPARING THE DATA OF SALES AND COMMISSION PAYMENT FOR THE AY.S.2007-08 TO 2010-11,HE HELD THAT IN THE AY.2008-09 TURNOVER HAD INCREASED BY 83.68%,THAT THE ASSESSEE HAD PAID COMMISSION OF 1% TO ITS DIRECTORS,THAT IN THE AY.S. 2009-10 AND 2010-11 THE TURNOVER INCREASED @ 32.65% AND 22% RESPECTIVELY,THAT THE DI RECTORS WERE PAID COMMISSION @ 2%AND 4% RESPECTIVELY FOR THOSE AY.S.AS HE WAS OF THE OPI NION THAT THE COMMISSION PAID DURING THE YEAR UNDER APPEAL WAS VERY HIGH AS COMPARED TO THE INCREASE IN SALES,SO,HE ASKED THE ASSESSEE AS TO WHY THE COMMISSION PAID TO THE DIRECTORS SHOU LD NOT BE RESTRICTED TO 2% ONLY.AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE,THE AO HELD THAT COMMISSION PAID DURING THE YEAR WAS VERY HIGH AS COMPARED TO THE INCREASE IN T URNOVER,THAT COMMISSION WAS PAID AS AN 5347/13-AARVIENCON-10-11 2 INCENTIVE FOR EXTRA EFFORTS PUT BY THE EMPLOYEES,TH AT THERE WAS INCREASE OF 22% IN THE SALE,THAT THE COMMISSION WAS DOUBLED FOR THE YEAR UNDER CONSI DERATION, THAT THERE WAS NO REASONABLE CAUSE,LOGIC TO PAY SUCH A HUGE AMOUNT OF COMMISSION ,THAT IT WAS SIPHONING OFF FUNDS FROM THE COMPANY IN THE NAME OF COMMISSION,THAT THE BOAR D RESOLUTION COULD NOT BE TAKEN AS AN EVIDENCE OF EXTRA SERVICE,THAT THE ASSESSEE HAD FAI LED TO JUSTIFY THE PAYMENT OF COMMISSION, THAT THE DIRECTORS HAD NOT PUT EXTRA SERVICES,THAT THE COMMISSION PAYMENT WAS TO BE DISALLOWED U/S. 40A(2B)OF THE ACT. THE AO ALSO REFERRED TO THE PROVISIONS OF SECTION 3 6(1)(II) OF THE ACT AND HELD THAT HIGHER COMMISSION WAS PAID TO AVOID DECLARATION OF DIVIDEN D,THAT THREE OF THE DIRECTORS WERE FAMILY MEMBERS,THAT IT WAS A DEVICE TO AVOID PAYMENT OF TA XES.FINALLY,HE RESTRICTED THE COMMISSION PAYMENT TO 2% AND MADE A DISALLOWANCE OF RS.1.21,39 ,377/-U/S.40A(2)(B)/36(1)(II)OF THE ACT. 3 .AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA).BEFORE HIM IT WAS ARGUED T HAT AS PER BOARD RESOLUTION DATED 20. 04.2007 COMMISSION WAS TO PAID TO THE TWO OF THE DI RECTORS AT FIXED RATE ONCE THE TURNOVER WAS TO EXCEED THE LIMIT FIXED AS PER RESOLUTION,THA T THE RESOLUTION DID NOT MENTION THAT COMMISSION PAYMENT WAS TO BE PROPORTIONATE TO INCRE MENTAL SALE,THAT THE DIRECTORS HAD APPEARED BEFORE THE AO DURING THE ASSESSMENT PROCEE DINGS AND EXPLAINED AND JUSTIFIED THE SERVICES RENDERED BY THEM IN RELATION TO COMPARATIV E PAYMENT MADE BY SEVERAL LISTED COMPANIES,THAT THE DIRECTORS WERE WELL QUALIFIED,TH AT THEY WERE ASSOCIATED WITH THE COMPANY SINCE 1987/ 2005,THAT THE PAYMENT WAS MADE OUT OF C OMMERCIAL EXPEDIENCY,THAT THERE WAS SUBSTANTIAL INCREASE IN GROSS AND NET PROFIT OF THE COMPANY DURING THE YEAR,THAT THE PROVISIONS OF SECTION 40A(2)(B)WERE WRONGLY INVOKED,THAT THE C OMPANY AND THE DIRECTORS WERE IN THE SAME TAX BRACKETS,NECESSITY OF EXPENDITURE WAS NO L ONGER A VALID TEST U/S.40A(2)(B),THAT THE AO HAD IGNORED THE CASES SUPPORTING THE CONTENTION OF THE ASSESSEE,THAT PROVISIONS OF SECTION 36(1)(II) WERE NOT APPLICABLE,THAT IN THE EARLIER Y EARS SAID SECTION WAS NOT INVOKED THOUGH THE ASSESSMENTS WERE MADE U/S.143(3)OF THE ACT. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE,T HE FAA HELD THAT THE ASSESSEE-COMPANY WAS AN ENGINEERING CONSULTANCY COMPANY,THAT BASED O N BOARD RESOLUTION OF IT WOULD PAY COMMISSION TO THE DIRECTORS,THAT COMMISSION WAS FIX ED AT 2% FOR THE TURNOVER OF RS.50.00 CRORES,THAT DURING THE YEAR UNDER APPEAL THE ASSESS EE HAD TURNOVER OF RS.60.69 CRORES,THAT COMMISSION PAYMENT @2% OF THE TURNOVER WAS NOT EXCE SSIVE,THAT REASONABLENESS OF EXPENDITURE IS TO BE JUDGED FROM THE POINT OF VIEW OF BUSINESSMAN.SHE REFERRED TO THE JUDGMENT OF HIVE COMMUNICATION OF HONBLE DELHI HIG H COURT.THE FAA COMPARED THE FIGURES OF COMMISSION PAID IF THE ASSESSEE WERE A P ARTNERSHIP FIRM.SHE FURTHER HELD THAT THE DIRECTORS AND THE COMPANY WERE ASSESSED AT THE SAME TAX RATES,THAT IT WAS NOT A CASE OF TAX EVASION.REFERRING TO THE JUDGMENTS OF DEMPO & CO.(P .)LTD.(196TAXMANN193)AND INDO SAUDI SERVICES(TRAVEL)(P.)LTD.(310ITR306),SHE HELD THAT T HE AO HAD NOT BROUGHT ON RECORD ANY COMPARATIVE MATERIAL TO SHOW THAT THE ASSESSEE HAD PAID COMMISSION TO THE DIRECTORS THAT WAS EXCESSIVE OR UNREASONABLE AS PER THE COMPARATIVE CA SES, THAT PAYMENT OF COMMISSION BASED ON TURNOVER WAS REASONABLE.FINALLY,THE APPEAL FILED BY THE ASSESSEE WAS ALLOWED. 4 .BEFORE US,THE THE DEPARTMENTAL REPRESENTATIVE(DR)S UPPORTED THE ORDER OF THE AO AND STATED THAT THERE WAS NO JUSTIFICATION FOR PAYING H UGE COMMISSION TO THE DIRECTORS.THE AUTHORISED REPRESENTATIVE(AR) STATED THAT THE COMMI SSION WAS PAID IN PURSUANCE OF THE BOARD RESOLUTION,THAT SAME WAS LINKED WITH PERFORMA NCE, THAT COMMISSION WAS NEITHER EXCESSIVE NOR UNREASONABLE, THAT COMMISSION PAID PU RSUANT TO THE RESOLUTION WAS ACCEPTED BY THE AO IN EARLIER YEARS WHILE PASSING THE ORDER U/S . 143(3), THAT BOTH THE DIRECTORS WERE HIGHLY QUALIFIED AND EXPERIENCED,THAT NO COMMISSION WAS PA ID TO NON WORKING DIRECTORS.HE REFERRED 5347/13-AARVIENCON-10-11 3 TO THE PAGE NO.53, 60 AND 62 OF THE PAPER BOOK.HE R ELIED UPON THE CASES OF JAGDAMBA ROLLER FLOOR MILLS LTD.(117ITD260),VOLTAMP TRANSFORMERS P. LTD.(129ITR105),ABBAS WAZIR PVT. LTD.(265ITR77). 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT THE COMMISSION WAS PAID PURSUANT TO THE RESOLUTION OF T HE BOARD OF DIRECTORS,THAT COMMISSION PAID TO DIRECTORS AS PER THE RESOLUTION WAS ACCEPTE D BY THE AO WHILE FRAMING ASSESSMENT FOR THE EARLIER YEARS,THAT COMMISSION PAID WAS LESS THA N WHAT WAS PERMISSIBLE AS A DEDUCTION FOR A PARTNERSHIP FIRM,THAT COMMISSION WAS NOT PAID TO NON WORKING DIRECTOR,THAT THERE WAS INCREASE IN TURNOVER FROM RS.49.00CRORES(APP.)TO RS .60.00 CRORES(APP.)IN THE CASE OF THE COMPANY FOR THE YEAR UNDER APPEAL,THAT REASONABLENE SS OF EXPENDITURE WAS TO BE DECIDED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT OF THE AO. IN THE CASES OF SHEHZAD A. NAND & SONS (108ITR358) AND CONSULTING ENGINEERING GROUP L TD.(365ITR284),IT HAS BEEN HELD THAT QUANTUM OF COMMISSION TO BE PAID IS TO BE DETERMINE D BY THE ASSESSEE AND NOT BY THE AO. ONE OF THE ESTABLISHED PRINCIPLES OF TAXATION JURIS PRUDENCE HOLDS THAT REASONABLENESS OF AN EXPENDITURE HAS TO BE JUDGED FROM THE ANGLE OF A BU SINESSMAN.WE FURTHER FIND THAT IN THE CASE OF INDO SAUDI SERVICES(TRAVEL)(P.)LTD., THE HONBLE BOMBAY HIGH COURT HAS HELD THAT UNDER BOARD CIRCULAR NO. 6-P, DATED JULY, 1968, NO DISALL OWANCE COULD BE MADE UNDER SECTION 40A(2) IN RESPECT OF PAYMENT MADE TO THE RELATIVES AND SISTER CONCERN WHERE THERE WAS NO ATTEMPT TO EVADE TAX.WE FIND THAT THE AO HAS FAILED TO ESTABLISH THAT THERE WAS ATTEMPT TO EVADE TAX BY THE ASSESSEE COMPANY.CONSIDERING THE A BOVE MENTIONED PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE OPINION TH AT THE ORDER OF THE FAA DOES NOT SUFFER FROM ANY LEGAL OR FACTUAL INFIRMITY.THERFORE, CONFI RMING HIS ORDER WE DECIDE THE EFFECTIVE GROUND OF APPEAL AGAINST THE AO. CO/235/MUM/2014: IN ITS CO THE ASSESSEE HAS SUPPORTED THE ORDER OF T HE FAA.WHILE DECIDING THE APPEAL FILED BY THE AO WE HAVE UPHELD THE ORDER OF THE FAA DELET ING THE ADDITION, THEREFORE, THE CO BECOMES INFRUCTUOUS AND STANDS DISMISSED. AS A RESULT, APPEAL FILED BY THE AO AND TH E C.O. OF THE ASSESSEE STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 1 ST JANUARY, 2016. 01 , 2016 SD/- SD/- ( / JOGINDER SINGH) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER /MUMBAI, /DATE 01.01.2016 . . . .. . JV.SR.PS. 5347/13-AARVIENCON-10-11 4 / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.