Income Tax Officer, Ward-1(2), Hyderabad V. A.R.Life Science Private Limited , Hyderabad

ITA 613/Hyd/2019

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 8594 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 6 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-11-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB-B
• Assessment Year: 2015-2016
• Appeal Filed On: 25-04-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Set aside
• Section: 143(3); 40(a)(ia); 13; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “B”: HYDERABAD (THROUGH VIRTUAL CONFERENCE) B EFORE SH RI SA TBEER SING H GODA RA, JU DI CIA L MEM BER AND SHR I L AXMI PR AS A D SAHU , AC COUNT ANT MEMBE R ITA No. 613/H/2019 Assessment Year: 2015-16 Income-tax Officer, Ward – 1(2), Hyderabad. Vs. A.R. Life Sciences Pvt. Ltd., Hyderabad. PAN – AAGCA 5553K (Appellant) (Respondent) Revenue by: Shri Rohit Mujumdar Assessee by: Shri Mohd. Afzal Date of hearing: 06/10/2021 Date of pronouncement: 15/11/2021 O R D E R PER L.P. SAHU, A.M.: This appeal filed by the Revenue is directed against CIT(A) - 1, Hyderabad’s order dated 27/02/2019 for AY 2015-16 involving proceedings u/s 143(3) of the Income Tax Act, 1961 ; in short “the Act on the following grounds of appeal: “i. The C1T(A) erred in law in deleting the disallowance ul s 40A(2)(b) of Rs.2.26 crores by ignoring that section 40A(2)(b) mandates disallowance of excessive or ITA No. 613/Hyd/2019 M / s A R L i f e S c i e n c e s P v t . L t d . , H y d . :- 2 -: unreasonable payments made to specified persons having regard to fair market value of the actual services rendered, the legitimate needs of the business or the benefits derived by or accruing to the assessee irrespective of whether same has been offered to tax by the recipients. ii. The C1T(A) erred in law in ignoring that Sec. does not contain any provision analogous to the second proviso to Sec. 40(a)(ia) iii. The C1T(A) erred in ignoring the fact that remuneration had been increased and one-time bonus had been paid inspite of the assessee company actually incurring business loss in two successive years. iv. The Ld. CIT (A) erred in passing a cryptic order on the issue by simply relying on submissions of assessee that the salary and remuneration had been offered to tax in hands of directors of company. Any other ground that may be urged at the time of hearing.” 2. Briefly the facts of the case are that the assessee filed its return of income for the AY 2015-16 on 30/09/2015 declaring total income of Rs. 10,40,90,350/- under normal provisions and book profit u/s 115 JB of Rs. 14,70,59,460/-. Subsequently, the case was selected for scrutiny and statutory notices were issued to the assessee. In response to the notices, the ld. AR of the assessee furnished the information called for. 2.1 During the course of assessment proceedings, the AO noticed that the assessee company had paid remuneration ITA No. 613/Hyd/2019 M / s A R L i f e S c i e n c e s P v t . L t d . , H y d . :- 3 -: of Rs. 33 lakhs each to both the directors of the company, namely, Shri Subba Reddy Kallam and Shri Krishna Chaitanya Kallam during the FY 2014-15 as compared to Rs. 18 lakhs each paid in the preceding year. The AO’s objections were that i) assessee could not justify the hike in remuneration, ii) assessee had suffered losses of Rs. 3,79,74,251/- during FY 2014-15 and Rs. 2,57,67,952/- during the FY 2013-14, which is evident that the assessee company did not do well in its business operations and iii) payment of higher remuneration did not commensurate with the business results. He therefore, held that since the remuneration was excessive, restricted the remuneration to Rs. 20 lakhs each. Also, he disallowed the bonus of Rs. 2 crores paid to Shri Krishna Chaitanya Kallam. Therefore, the total disallowance of remuneration and bonus comes to Rs. 2,26,00,000/- and added the same to the returned income. 3. When the assessee preferred an appeal before the CIT(A), the CIT(A) after considering the submissions of the assessee, deleted the addition made by the AO by observing as under: 4. Aggrieved by the order of the CIT(A), the revenue is in appeal before the ITAT. ITA No. 613/Hyd/2019 M / s A R L i f e S c i e n c e s P v t . L t d . , H y d . :- 4 -: 5. Before us, the ld. DR submitted that the C1T(A) erred in law in deleting the disallowance u/s 40A(2)(b) of Rs.2.26 crores by ignoring that section 40A(2)(b) mandates disallowance of excessive or unreasonable payments made to specified persons having regard to fair market value of the actual services rendered, the legitimate needs of the business or the benefits derived by or accruing to the assessee irrespective of whether same has been offered to tax by the recipients. He further submitted that the C1T(A) erred in ignoring the fact that remuneration had been increased and one-time bonus had been paid inspite of the assessee company actually incurring business loss in two successive years. He, therefore, prayed that the order of the CIT(A) be set aside and that of the AO be restored. 6. The ld. AR, on the other hand, filed written submissions, which are as under: “i. During the course of assessment proceedings the learned Assessing Officer not brought any material on record to say that the remuneration paid to Directors @ Rs.33,00,000/- each of the Director namely Subba Reddy Kallam and Sri Krishna Chaitanya Kallam. In respect of payment of bonus of Rs.2,00,00,000/- to Krishna Chaitanya Kallam also no material is brought on record. The assessee submitted copy of the approval of the Board of Directors in respect of enhancement of remuneration of Rs.18 1akhs to 13 1akhs and also payment of Rs.2,00,00,000/- to Krishna Chaitanya Kallam. It was also submitted that the resolution of the Board of Directors is submitted before the ROC in Form ITA No. 613/Hyd/2019 M / s A R L i f e S c i e n c e s P v t . L t d . , H y d . :- 5 -: - No.MGT-14. The assessee submitted that Sri Krishna Chaitanya Director of the company is highly qualified technocrat having masters Degree in sciences from Lova University United States, with ten years experience in the field of manufacturing of pharmaceutical products. Against these facts no material was brought on record to disallow the enhanced remuneration aggregating to Rs.26,00,000/- and bonus of Rs.200,00,000/-. ii. The learned Assessing Officer was appraised that the Directors have filed their returns of income and paid the taxes accordingly, considering the remuneration at Rs.33,00,000/- each and also the other Director in addition to the remuneration of Rs.33,00,000/- offered Rs.2,00,00,000/- as income received in the form of bonus. The learned Assessing Officer was appraised that both the Directors and the assessee are in the range of 30% tax and therefore, there is no loss of Revenue whether the same is assessed in the hands of assessee or in the hands of Directors. Therefore, it was submitted there is no attempt to evade the tax. iii. The learned Assessing Officer stepped into the shoe of assessee company and rejected the Board Resolution in respect of payment of remuneration and bonus without bringing any adverse remarks against the payment which is not allowable as per the provisions of the IT Act. In the following mentioned cases the Hon'b1e High Court of Gujarat and Hon'b1e ITAT's of Mumbai and Delhi have considered the issue of disallowance of remuneration to the Directors and held that the same is not to be disallowed: the following cases are as; 1. PWs Engineers Ltd Vs Dy.CIT, in Tax Appeal No.209 of 2015, (Guj-HC). ITA No. 613/Hyd/2019 M / s A R L i f e S c i e n c e s P v t . L t d . , H y d . :- 6 -: 2. M/s Second leasing Pvt Ltd Vs DCIT Cirlce-8(1), New Delhi, in ITA No.2412/Del/2013, ITAT Delhi. 3. DCIT Circle 2(1) Mumbai Vs Bombay Samachar Pvt Ltd, in ITA No.35/Mum/2016.” 7. We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. On perusal of the written submissions quoted supra, we find that the assessee paid the enhanced remuneration to the Directors after taking approval of the Board of Directors, a copy of which is filed on record and the same was submitted to ROC in Form No. MGT-14. Further, the Directors have shown their remuneration and bonus paid in their returns of income, which were assessed by the AO that the Directors are in the range of 30% tax. We are therefore of the view that there is no loss to Revenue whether the same is assessed in the hands of the assessee or in the hands of Directors. The case law relied upon by the ld. AR supports the case of the assessee. In view of the above observations, we find no infirmity in the order of the CIT(A) in deleting the addition of Rs. 2,26,00,000/- made by the AO on account of remuneration and bonus paid to the Directors and upholding the same, we dismiss the grounds raised by the revenue in this regard. ITA No. 613/Hyd/2019 M / s A R L i f e S c i e n c e s P v t . L t d . , H y d . :- 7 -: 8. In the result, appeal of the revenue is dismissed in above terms. Pronounced in the open court on 15 th November, 2021. Sd/- Sd/- (S.S. GODARA) (L. P. SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated: 15 th November, 2021. kv Copy to : 1 ITO, Ward – 1(2), 7 th Floor, “B” Block, IT Towers, AC Guards, Masab Tank, Hyderabad. 2 M/s AR Life Sciences Pvt. Ltd., Plot No. 150B, Flat No. G-1, Mythreya Apartments, SR Nagar, Hyderabad – 500 038. 3 CIT(A) -1, Hyderabad 4 Pr. CIT – 1, Hyderabad 5 ITAT, DR, Hyderabad. 6 Guard File.