R G Chandak & Co., Nashik V. ACIT,Cir.-2, Nashik

ITA 570/PUN/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 5251 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 6 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-11-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 12-11-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 02-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P L PATHADE
• Assessee Lawyers: NANI WADEKAR
• Keywords: Maximum Marginal Rate; Fair market value; Avoidance of tax

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO. 570/PN/2011 (ASSTT.YEAR : 2006-07) R.G. CHANDAK AND COMPANY, S-7 UTILITY CENTRE, OPP : RAJIV GANDHI BHAVAN, NASHIK-422002 PAN NO.AACFR9538E .. APPELLANT VS. ACIT, CIRCLE-II, NASHIK .. RESPONDENT APPELLANT BY : SHRI NANIWADEKAR RESPONDENT BY : SHRI P.L. PATHADE DATE OF HEARING : 12-11-2013 DATE OF PRONOUNCEMENT : 27-11-2013 ORDER PER R.K. PANDA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER DATED 28-02-2011 OF THE CIT(A)-II, NASHIK RELATING TO ASS ESSMENT YEAR 2006-07. 2. THIS APPEAL WAS EARLIER DISMISSED BY THE TRIBUNA L FOR NON- APPEARANCE. SUBSEQUENTLY, THE TRIBUNAL VIDE M.A.NO .47/PN/2013 ORDER DATED 28-05-2013 RECALLED THE ORDER. HENCE, THIS I S A RECALLED MATTER. 3. DISALLOWANCE OF RS.2 LAKHS U/S.40A(2)(B) BY THE ASSESSING OFFICER AND UPHELD BY THE CIT(A) IS THE ONLY ISSUE RAISED B Y THE ASSESSEE IN THE GROUNDS OF APPEAL. 4. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF DEALING IN PETROL PRODUC TS, TYRES, TUBES AND TRUCK PLYING. DURING THE COURSE OF ASSESSMENT PROCEEDING S THE ASSESSING OFFICER 2 NOTED THAT THE ASSESSEE PAID SALARY TO THE PERSONS SPECIFIED U/S.40A(2)(B). HE, THEREFORE, ASKED THE ASSESSEE TO EXPLAIN THE RE ASONABLENESS OF SALARY PAID TO RELATIVES AND PARTNERS HAVING REGARD TO THE FAIR MARKET VALUE OF THE SERVICES FOR WHICH PAYMENT IS MADE. 4.1 FROM THE DETAILS FURNISHED BY THE ASSESSEE THE ASSESSING OFFICER NOTED THAT THERE IS SUBSTANTIAL INCREASE IN SALARY PAID TO THE FOLLOWING PERSONS DURING THE YEAR AS COMPARED TO THE PRECEDIN G YEAR : IT WAS EXPLAINED BY THE ASSESSEE THAT THE INCREASE IN SALARY IS COMMENSURATE WITH THE INCREASE IN TURNOVER AND IMPRESSIVE OF GRO WTH IN THE BUSINESS DUE TO INTRODUCTION OF YOUNG BLOOD. THE ASSESSING OFFIC ER ADMITTED THAT THERE IS INCREASE IN TURNOVER. HE, HOWEVER, OBSERVED THAT T HE ASSESSEE HAS NOT PROVED THAT THE INCREASE IN TURNOVER IS ATTRIBUTABL E MAINLY DUE TO THE SERVICES RENDERED BY THE ABOVE PERSONS. HE NOTED T HAT THE BUSINESS OF THE ASSESSEE IS VERY OLD ONE AND WELL SETTLED. THE COM MODITY DEALT WITH IS SUCH THAT IT NEEDS NO MORE EFFORTS TO INCREASE THE TURNO VER. IN VIEW OF THE ABOVE, THE ASSESSING OFFICER WAS OF THE OPINION THAT THE I NCREASE IN SALARY CANNOT BE SAID TO BE REASONABLE CONSIDERING THE MARKET SIT UATION AND THE QUALIFICATION AND EXPERIENCE OF SHRI YOGESH V. CHAN DAK, SHRI UMESH M. CHANDAK AND SHRI SUNIL V.CHANDAK. THE ASSESSING OF FICER ACCORDINGLY DISALLOWED AN AMOUNT OF RS.2 LAKHS U/S.40A(2)(B) BE ING EXCESSIVE SALARY PAID TO RELATED PERSONS. SR.NO. NAME SALARY IN A.Y. 2005-06 SALARY IN A.Y. 2006-07 1 SUNIL V. CHANDAK 3,60,000/- 6,00,000/- 2 YOGESH V. CHANDAK 3,60,000/- 6,00,000/- 3 UMESH M. CHANDAK 1,80,000/- 6,00,000/- 3 5. BEFORE THE CIT(A) IT WAS SUBMITTED THAT THE INCR EASE IN TURNOVER OF THE FIRM IS THE RESULT OF COLLECTIVE EFFORTS OF ALL PERSONNEL WORKING IN THE ORGANISATION INCLUDING THAT OF THE PERSONS REFERRED TO BY THE AO. THE QUALIFICATION OF THE PERSONS AND THEIR EXPERIENCE W AS BROUGHT TO THE NOTICE OF THE LD.CIT(A), ACCORDING TO WHICH SHRI SUNIL V. CHANDAK IS A B.COM GRADUATE HAVING 15 YEARS OF EXPERIENCE. SIMILARLY SHRI YOGESH V. CHANDAK IS AN MBA GRADUATE WITH 10 YEARS OF EXPERIENCE. IT WAS SUBMITTED SHRI UMESH V. CHANDAK IS ALSO A MBA GRADUATE WITH 8 YEAR S OF EXPERIENCE AND IS NOT A RELATED PERSON AS ALLEGED BY THE ASSESSING OFFICER. IT WAS SUBMITTED THAT DUE TO THE EFFORTS OF THE YOUNG PERSONS THE TU RNOVER DURING F.Y. 2002- 03 AT RS.7.40 CRORES HAS GONE UPTO RS.9.03 CRORES D URING F.Y. 2003-04 WHICH HAS GONE UPTO RS.27.76 CRORES DURING F.Y. 200 4-05, AND RS.53.06 CRORES DURING F.Y. 2005-06. VARIOUS DECISIONS WERE ALSO BROUGHT TO THE NOTICE OF THE LD.CIT(A) TO THE PROPOSITION THAT NO DISALLOWANCE U/S.40A(2)(B) COULD HAVE BEEN MADE UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE. 6. HOWEVER, THE LD.CIT(A) ALSO WAS NOT SATISFIED WI TH THE EXPLANATION GIVEN BY THE ASSESSEE AND UPHELD THE DISALLOWANCE M ADE BY THE ASSESSING OFFICER. WHILE DOING SO, HE OBSERVED THAT ALTHOUG H THERE IS INCREASE IN THE TURNOVER OF THE FIRM FROM RS.22.76 CRORES IN F.Y. 2 004-05 TO RS.53.06 IN F.Y. 2005-06, HOWEVER, THE ENTIRE RISE CANNOT BE AT TRIBUTED TO THE ABOVE REFERRED PERSONS ALONE. ACCORDING TO HIM, EVERY IN CREASE IN TURNOVER WOULD NOT JUSTIFY RELATABLE INCREASE IN SALARY OF THE PER SONS MENTIONED ABOVE. THE SAME NATURE OF BUSINESS WAS BEING CARRIED ON BY THE ASSESSEE FIRM IN THE EARLIER YEARS. FURTHER, THE TURNOVER OF RS.53.06 C RORES IN THE F.Y. 2005-06 COULD BE ASCERTAINED ONLY AT THE END OF THE YEAR AN D NOT AT THE BEGINNING OF 4 THE YEAR WHEN THE STEEP HIKE IN THE SALARY WAS MADE . ACCORDING TO HIM, NOTHING SPECIAL OR EXTRAORDINARY WAS BROUGHT ON REC ORD TO SHOW THAT DUE TO THE EFFORTS OF THE RELATED PARTIES THE TURNOVER HAS GONE UP FROM RS.22.76 CRORES TO RS.55.06 CRORES. RELYING ON THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF SHREE LAXMI MARKETING PVT. LTD. VS. ACIT REPORTED IN 122 TTJ PUNE 9108 HE UPHELD THE DISALLOWANCE MAD E BY THE ASSESSING OFFICER. 6.1 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASS ESSEE IS IN APPEAL BEFORE US. 7. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SAME SUBMISSIONS AS MADE BEFORE THE ASSESSING OFFICER AND THE CIT(A). HE SUBMITTED THAT MR. UMESH M. CHANDAK IS NOT A RELATED PERSON. ALTHOUGH THIS WAS STATED BEFORE THE LD.CIT(A), HOWEVER, HE HAS NOT GIVEN ANY FINDIN G ON THE APPLICABILITY OF PROVISIONS OF SECTION 40A(2)(B) IN CASE OF MR. U MESH M. CHANDAK. HE SUBMITTED THAT THE PERSONS TO WHOM REMUNERATION HAS BEEN PAID ARE QUALIFIED PERSONS HAVING VAST EXPERIENCE AND THEREF ORE THE REASONABLENESS OF THE SALARY SHOULD NOT HAVE BEEN DOUBTED. 7.1 REFERRING TO THE DECISION OF HONBLE BOMBAY HIG H COURT IN THE CASE OF CIT VS. INDO SAUDI SERVICES (TRAVEL) PVT. LTD. R EPORTED IN 310 ITR 306 HE SUBMITTED THAT WHEN THE RELATED PARTY PAYS TAX A T A HIGHER RATE IT CANNOT BE CONSIDERED AS A CASE OF TAX EVASION AND NO DISAL LOWANCE SHOULD BE MADE ON ACCOUNT OF EXCESSIVE AND UNREASONABLE PAYMENT. REFERRING TO THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE O F CIT VS. V.S. DEMPO AND COMPANY PVT. LTD. REPORTED IN 336 ITR 209 HE SUBMITTED THAT SIMILAR VIEW HAS BEEN TAKEN IN THE ABOVE DECISION. HE ACCORDINGLY 5 SUBMITTED THAT THE DISALLOWANCE MADE BY THE ASSESSI NG OFFICER AND UPHELD BY THE CIT(A) SHOULD BE DELETED. 8. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND HEAVILY RELIED ON THE ORDER OF THE CIT(A). 9. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE HAS PAID SALARY OF RS.6 LAKHS EACH TO MR. SUNIL V. CHANDAK, MR. YOGESH V. CHANDAK AND MR. UMESH M. CHANDAK DURING THE IMPUGNE D ASSESSMENT YEAR AS AGAINST RS. 3,60,000/- EACH TO MR. SUNIL V. CHANDAK AND MR. YOGESH V. CHANDAK AND RS.1,80,000/- TO MR. UMESH M. CHANDAK IN THE PRECEDING YEAR. WE FIND THE ASSESSING OFFICER DISA LLOWED AN AMOUNT OF RS.2 LAKHS BEING EXCESSIVE AND UNREASONABLE SALARY/ REMUNERATION U/S.40A(2)(B) WHICH HAS BEEN UPHELD BY THE LD.CIT(A ). 9.1 FROM THE VARIOUS DETAILS FURNISHED BY THE ASSES SEE, WE FIND THE ASSESSEE HAS STATED BEFORE THE LD.CIT(A) THAT MR. U MESH M. CHANDAK, WHO IS AN MBA GRADUATE WITH 10 YEARS OF EXPERIENCE IS N OT A RELATIVE WITHIN THE MEANING OF PROVISIONS OF SECTION 2(41) OF THE I .T. ACT, 1961 AND THEREFORE THE PROVISIONS OF SECTION 40A(2)(B) ARE N OT APPLICABLE TO PAYMENTS MADE TO HIM. DESPITE THE ABOVE SUBMISSION, WE FIND THE ORDER OF THE LD.CIT(A) IS SILENT ON THIS ISSUE. SIMILARLY, WE F IND MR. SUNIL V. CHANDAK IS A COMMERCE GRADUATE WITH 15 YEARS OF EXPERIENCE AND MR. YOGESH V. CHANDAK IS AN MBA GRADUATE WITH 10 YEARS OF EXPERIE NCE. UNDISPUTEDLY, THE TURNOVER OF THE ASSESSEE FIRM HAS GONE UP FROM RS.22.76 CRORES DURING F.Y. 2004-05 TO RS.53.06 CRORES DURING F.Y. 2005-06 . EVEN THOUGH THE 6 ASSESSEE IS IN THE BUSINESS SINCE LAST SO MANY YEAR S AND THE COMMODITY DEALT WITH IS SUCH THAT THE ASSESSEE WOULD NOT REQUIRE MO RE EFFORTS TO INCREASE THE TURNOVER, HOWEVER, WITHOUT THE EFFORTS OF THE YOUNG PERSONS THE ASSESSEE FIRM IN OUR OPINION WOULD NOT HAVE GOT SUCH HUGE JU MP IN THE TURNOVER. THE FACT THAT THE ASSESSEE FIRM HAS ALSO RECEIVED C OMMISSION OF RS.264.74 LAKHS DURING F.Y. 2005-06 AS AGAINST RS.91.42 LAKHS IN THE PRECEDING YEAR CANNOT BE IGNORED. NOTHING HAS BEEN BROUGHT ON REC ORD BY THE ASSESSING OFFICER OR THE CIT(A) AS TO WHAT IS THE FAIR MARKET VALUE OF THE SERVICES RENDERED BY THE PERSONS WITH SUCH QUALIFICATION AND EXPERIENCE IN SIMILARLY PLACED SITUATION. NO COMPARISON HAS BEEN GIVEN. 9.2 FURTHER, WE FIND THE SUBMISSION OF THE LD.COUN SEL FOR THE ASSESSEE THAT THE FIRM AS WELL AS THE EMPLOYEES COVERED U/S. 40A(2)(B) WERE TAXED AT THE MAXIMUM MARGINAL RATE FOR THE YEAR UNDER APPEAL AND THEREFORE THERE IS NEITHER EVASION NOR AVOIDANCE OF TAX BY THE ASSESSE E AS A RESULT OF PAYMENT OF SALARY TO THE RELATED PERSONS COULD NOT BE CONTR OVERTED BY THE LD. DEPARTMENTAL REPRESENTATIVE. CONSIDERING THE TOTAL ITY OF THE FACTS OF THE CASE, WE ARE OF THE OPINION THAT THE REVENUE AUTHOR ITIES IN THE INSTANT CASE ARE NOT JUSTIFIED IN DISALLOWING THE AMOUNT OF RS.2 LAKHS U/S.40A(2)(B) OF THE I.T. ACT. 9.3 THE DECISION RELIED ON BY THE LD.CIT(A) IN THE CASE OF SHREE LAXMI MARKETING PVT. LTD. (SUPRA) IS DISTINGUISHABLE AND NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. IN THAT CASE, THE TRIBU NAL HAS OBSERVED AS UNDER WHICH HAS BEEN REPRODUCED BY THE LD.CIT(A) IN HIS O RDER : WHEN THE EXPENDITURE CLAIMED BY THE ASSESSEE IS HI T BY U/S.40A(2), IT IS FOR THE ASSESSEE TO ESTABLISH BY PROPER EVIDENCES THAT THE PARTICULAR DEDUCTION OF EXPENSES IS JUSTIF IABLE AND NOT EXCESSIVE OR UNREASONABLE. ONCE THE REMUNERATIONS WERE PAID BY THE ASSESSEE COMPANY TO THE DIRECTORS FALLING UN DER THE 7 CATEGORY OF PERSONS SPECIFIED U/S.40A(2)(B) AND SIN CE THE AO REQUIRED THE ASSESSEE COMPANY TO PROVE THE REASONAB ILITY OF THE PAYMENT OF REMUNERATION PAID TO THE DIRECTORS, IT W AS THE BURDEN OF THE ASSESSEE TO PROVE AND ESTABLISH BY PROPER EV IDENCE THAT THE REMUNERATION PAID TO THE DIRECTORS WAS NOT EXCE SSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE SERVICES RENDERED BY THE DIRECTORS FOR WHICH THE PA YMENT IS MADE OR THE LEGITIMATE NEEDS OF THE ASSESSEES BUSI NESS OR THE BENEFIT DERIVED BY THE ASSESSEE FROM THE SAID EXPEN DITURE OF REMUNERATION PAID TO THE DIRECTORS. HOWEVER, IN THE INSTANT CASE, AS OBSERVED EARLIER, ONE OF THE PERSONS NAMELY MR. UMESH M. CHANDAK IS NOT A RELATIVE AS PER PRO VISIONS OF SECTION 2(41) OF THE ACT AND THEREFORE, IS NOT HIT BY THE P ROVISIONS OF SECTION 40A(2)(B). THE OTHER 2 PERSONS WHO ARE RELATED PER SONS ARE QUALIFIED AND HAVING VAST EXPERIENCE AND NOTHING HAS BEEN BROUGH T ON RECORD BY THE ASSESSING OFFICER AS TO WHAT IS THE FAIR MARKET VAL UE OF THE SERVICES IN SIMILAR BUSINESS WITH SUCH EXPERIENCE AND QUALIFICA TION. THEREFORE, THE DECISION RELIED ON BY LD.CIT(A) IN OUR OPINION IS N OT APPLICABLE TO THE FACTS OF THE PRESENT CASE. THE HUGE INCREASE IN THE TURNO VER AND THE RECEIPT OF COMMISSION IN OUR OPINION CANNOT BE IGNORED FOR THE INCREASE IN THE REMUNERATION TO THE RELATED PERSONS. IN THIS VIEW OF THE MATTER, WE ARE OF THE OPINION THAT NO DISALLOWANCE UNDER THE FACTS AN D CIRCUMSTANCES OF THE CASE IS CALLED FOR. WE ACCORDINGLY SET-ASIDE THE O RDER OF THE CIT(A) AND DIRECT THE ASSESSING OFFICER TO DELETE THE DISALLOW ANCE. THE GROUND RAISED BY THE ASSESSEE IS ACCORDINGLY ALLOWED. 10. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 27-11-2013. SD/- SD/- (SHAILENDRA KUMAR YADAV) (R. K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED : 27 TH NOVEMBER, 2013 SATISH 8 COPY OF THE ORDER IS FORWARDED TO : 1. THE ASSESSEE 2. THE DEPARTMENT 3. THE CIT(A)-II, NASHIK 4. THE CIT-II, NASHIK 5. D.R. A BENCH, PUNE 6. GUARD FILE BY ORDER // TRUE COPY // SENIOR PRIVATE SECRETARY, INCOME TAX APPELLATE TRIBUNAL, PUNE