M/s. Tulasi Cotton Industries Pvt. Ltd, Guntur V. The Assistant Commissioner of Income Tax, Circle-2(1), Guntur

ITA 627/VIZ/2019

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 2910 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 1 year(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-11-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2016-2017
• Appeal Filed On: 08-11-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: U. MINI CHANDRAN
• Keywords: Tax effect; Set aside; Capital Gains
• Section: 201

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM (THROUGH WEB - BASED VIDEO CONFERENCING PLATFORM) . , . . , BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER ./ I.T. A.NO. 627 /VIZ/201 9 ( / A SSESSMENT Y EAR : 2016 - 2017 ) M/S TULASI COTTON INDUSTRIES PVT. LTD RAJ KAMAL COMPLEX LAKSHMIPURAM MAIN ROAD ASHOK NAGAR GUNTUR [PAN :AACCT9123A] VS. ASST. COMMISSIONER OF INCOME TAX CIRCLE - 2(1) GUNTUR ( / APPELLANT) ( / RESPONDENT) / APPELLANT BY : SHRI G.V.N.HARI . AR / RESPONDENT BY : SMT.U.MINI CHANDRAN, DR / DATE OF HEARING : 24 .0 9. 2020 / DATE OF PRONOUNCEMENT : 23.11.2020 / O R D E R P ER SHRI D.S.SUNDER SINGH, ACCOUNTANT MEMBER : TH IS APPEAL IS FILED BY THE ASSESSE E AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) [CIT(A)] - 1 , GUNTUR IN APPEAL NO. 10178 /20 18 - 19 DATED 04.06 .201 9 FOR THE ASSESSMENT YEAR (A.Y.) 201 6 - 17 . 2 I.T.A. NO. 627/VIZ/2019, A.Y.2016 - 17 M/S TULASI COTTON INDUSTRIES PVT. LTD., GUNTUR 2. IN THIS CASE, THERE WAS A DELAY OF 67 DAYS IN FILING THE APPEAL. THE ASSESSEE FILED CONDONATION PETITION, STATING THAT THE ASSESSE ES WIFE DIAGNOSED WITH CANCER, CONSEQUENTLY HE HA S TO SPEND LOT OF TIME IN ATTENDING TO HER AND GETTING THE TREATMENT TO HIS WIFE AND IN THE PROCESS, THE ASSESSEE COULD NOT FILE THE APPEAL BEFORE THE TIME ALLOWED UNDER THE A CT . THE ASSESSEE ALSO PLACED THE MEDICAL CERTIFICATE, SUPPORTING THE TREATMENT UNDERGONE BY SMT.TULASI, WIFE OF THE ASSESSE E. WE HAVE HEARD BOTH THE PARTIE S AND CONDONE THE DELAY. 3. THE ONLY ISSUE IN THIS APPEAL IS RELATED TO THE REMUNERATION PAID TO THE M ANAGING D IRECTOR. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE HAS PAID THE REMUNERATION OF RS.3,00,00,000/ - TO SRI TULASI RAMACHANDRA PRABHU, MANAGING DIRECTOR OF THE ASSESSEE COMPANY. DURING THE YEAR UNDER CONSIDERATION THE COMPANY HAS NO TURNOVER EXCEPT THE INTEREST INCOME AND THE CAPITAL GAINS . IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, THE AO FOUND THAT THE MAN AGING DIRECTOR WAS PAID THE REMUNERATION OF RS.30,00,000/ - . SINCE THERE WAS NO BUSINESS IN THE ASSESSEE COMPANY, THE AO VIEWED THAT THE PAYMENT OF RS.3 .00 CRORES AS REMUNERATION TO THE MANAGING DIRECTOR IS EXCESSIVE BUT NOT DUE TO THE BUSINESS EXPEDIENCY . ACCORDINGLY THE AO VIEWED THAT THE 3 I.T.A. NO. 627/VIZ/2019, A.Y.2016 - 17 M/S TULASI COTTON INDUSTRIES PVT. LTD., GUNTUR EXPENDITURE WA S NOT WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF BUSINESS, HENCE, ALLOW ED THE SUM OF RS.30,00,000/ - AND DISALLOWED THE BALANCE AMOUNT OF RS.2,70,00,000/ - AND COMPLETED THE ASSESSMENT. 4. AGAINST WHICH THE ASSESSEE WENT ON APPEAL BEFORE THE CIT(A) AND SUBMITTED THAT THE REMUNERATION WAS ACTUALLY PAID TO THE M ANAGING D IRECTOR TOWARDS THE SERVICES RENDERED BY HIM . THE LD.A.R FURTHER SUBMITTED THAT SRI TULASI RAMACHANDRA PRABHU , THE MANAGING DIRECTO R IS WORKING WITH THE COMPANY FOR LONG YEARS AND THE COMPANY COULD NOT COMPENSATE HIM EARLIER. S INCE THERE WERE FUNDS AVAILABLE , R ECOGNIZING THE SERVICES RENDERED BY THE MANAGING DIRECTOR, THE ASSESSEE COMPANY PAID THE REMUNERATION OF RS. 3 .00 CRORES . T HE ASSESSE E FURTHER ARGUED THAT THERE IS NO RESTRICTION FOR PAYMENT OF REMUNERATION AS PER COMPANIES ACT , THUS SUBMITTED THAT THE REMUNERATION PAID TO THE MANAGING DIRECTOR IS REASONABLE AND IN ACCORDANCE WITH THE LAW. HENCE REQU ESTED TO DELETE THE ADDIT ION. THE LD.CIT(A) OBSERVED THAT THE ASSESSEE COMPANY HAS SOLD THE PROPERTY AND RECEIVED THE SALE CONSIDERATION. IN THE EARL IER YEARS, THE REMUNERATION PAID WAS ONLY RS.30,00,000/ - , AS AGAINST WHICH THE ASSESSEE HAS PAID THE REMUNERATION OF RS.3,00,00,000 / - , WHICH IS UNREASONABLE. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS SOLD THE PROPERTY FOR 4 I.T.A. NO. 627/VIZ/2019, A.Y.2016 - 17 M/S TULASI COTTON INDUSTRIES PVT. LTD., GUNTUR A SUM OF RS.6.30 CRORES AND OFFERED THE SAME AS CAPITAL GAINS. THE LD.CIT(A) FURTHER OBSERVED THAT THE ASSESSEE COULD NOT ESTABLISH WITH COGENT EVIDENC E TO SHOW THAT THE PAYMENT WAS MADE TO THE MANAGING DIRECTOR ON PRUDENT BUSINESS LINES. THE LD.CIT(A) FURTHER VIEWED THAT THE PAYMENT MADE TO THE MANAGING DIRECTOR IS EXCESSIVE AND ACCORDINGLY HELD THAT THE TRANSACTION IS A COLOURABLE DEVICE, SINCE THE MA NAGING DIRECTOR WAS HAVING LOSSES AND SET OFF THE LOSSES AGAINST THE REMUNERATION PAID BY THE COMPANY. ACCORDINGLY CONFIRMED THE ADDITION MADE BY THE AO AND DISMISSED THE APPEAL OF THE ASSESSEE . 5. AGAINST WHICH THE ASSESSEE IS IN APPEAL BEFORE THIS TRIBUNAL. DURING THE APPEAL HEARING, THE LD.AR REITERATED THE ARGUMENTS MADE BEFORE THE CIT(A) AND SUBMITTED THAT THE PAYMENT WAS GENUINE AND THE AMOUNT RECEIVED BY THE MANAGING DIREC TOR WAS OFFERED AS INCOME IN HIS HANDS. THE LD. AR FURTHER SUBMITTED THAT THERE WAS NO LIMIT AS PER THE COMPANIES ACT FOR PAYMENT OF REMUNERATION TO THE MANAGING DIRECTOR. NEITHER THE AO NOR THE CIT(A) ARRIVED AT THE FAIR REMUNERATION FOR THE SERVICES RENDERED BY THE MANAGING DIRECTOR. THE LD.AR FURTH ER SUBMITTED THAT IN THE INSTANT CASE, THE MANAGING DIRECTOR WAS SERVING THE COMPANY FOR A LONG TIME AND MADE LOT OF EFFORTS TO DISPOSE OFF THE PROPERTY FOR THE BETTER PRICE . SINCE THE 5 I.T.A. NO. 627/VIZ/2019, A.Y.2016 - 17 M/S TULASI COTTON INDUSTRIES PVT. LTD., GUNTUR AMOUNT WAS PAID TO THE MANAGING DIRECTOR AS REMUNERATION AND THE SAME WAS ALSO OFFERED AS INCOME IN HIS HANDS , THERE IS NO LOSS OF REVENUE . T HE LD.AR ARGUED THAT THE REMUNERATION PAID TO T HE MANAGING DIRECTOR IS GENUINE AND NO T A CASE OF COLO U RABLE DEVICE , HENCE, REQUESTED TO SET ASIDE THE ORDER OF THE LD.CIT(A) AND ALLOW THE APPEAL OF THE ASSESSEE . 6. ON THE OTHER HAND, THE LD.DR ARGUED THAT THOUGH THERE WAS NO LIMIT PRESCRIBED BY COMPANIES ACT FOR PAYMENT OF REMUNERATION, T HE TRANSACTION IS A COLOURABLE DEVICE AS APPEARING IN PAGE NO.4 OF THE ASSESSMENT ORDER, WHEREIN, T HE MANAGING DIRECTOR HAS PA ID THE TAXES OF RS.17,049/ - AFTER SET OFF OF LOSSES FROM BUSINESS. THUS ARGUED THAT HIGHER REMUNERATION WAS PAID TO THE MANAGING DIRECTOR WITH AN INTENTION TO REDUCE THE TAX BURDEN IN THE HANDS OF THE ASSESSEE COMPANY AND TO RE DUCE THE LOSSES IN THE HANDS OF THE MA NAGING DIRECTOR, THUS THE SAME WAS COLOURABE DEVICE, HENCE, ARGUED THAT THE LD.CIT(A) HAS RIGHTLY RESTRICTED THE DISALLOWANCE AND NO INTERFERENCE IS CALLED FOR. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERI AL PLACED ON RECORD. IN THIS CASE, THE COMPANY HAS PAID THE REMUNERATION OF RS.3,00,00,000/ - WHICH THE AO VIEWED THAT THE REMUNERATION PAID WAS EXCESSIVE COMPARED TO THE TURNOVER OF THE COMPANY. ACCORDING TO THE AO, 6 I.T.A. NO. 627/VIZ/2019, A.Y.2016 - 17 M/S TULASI COTTON INDUSTRIES PVT. LTD., GUNTUR THERE WAS NO TURNOVER IN THE YEAR UNDER CONSIDERATION, HENCE , HELD THAT THERE IS NO JUSTIFICATION FOR PAYMENT OF REMUNERATION OF RS.3.00 CRORES AND ARRIVED AT THE REMUNERATION OF RS.30,00,000/ - AS REASONABLE AND DISALLOWED THE REMAINING AMOUNT OF RS.2,70, 00,000/ - . THE AO DID NOT ARRIVE AT THE FAIR AND REASONABLE REMUNERATION PAYABLE TO THE MANAGING DIRECTOR AND HE DID NOT GIVE ANY BASIS TO DISALLOW THE REMUNERATION. ACCORDING TO THE LD.AR THE MANAGING DIRECTOR TRAVELLED EXTENSIVELY AND USED HIS INFLUENCE TO IDENTIFY THE BUYER TO SELL THE PROPERTY FOR HIGHER AMOUNT. APART FROM THE ABOVE, THE LD.A.R ALSO SUBMITTED THAT TURNOVER IS NOT ONLY THE BASIS FOR FIXING THE REMUNERATION AND WHAT IS TO BE CONSIDERED IS THE SERVICES RENDERED BY THE M ANAGING DIRECTOR TO THE COMPANY. WE AGREE WITH THE CONTENTION OF THE LD.AR THAT TURNOVER ONLY CANNOT BE TAKEN AS BASIS FOR REMUNERATION AND IT IS NECESSARY TO LOOK INTO THE SERVICES RENDERED BY THE M.D. IN THE A.Y.2014 - 15, NO REMUNERATION WAS PAID TO THE M.D AND IN THE EAR LIER YEAR ALSO, THE REMUNERATION PAID TO THE MANAGING DIRECTOR WAS LES S AND ACCORDING TO THE LD.AR, IT DOES NOT COMMENSURATE WITH THE SERVICES RENDERED BY THE M ANAGING DIRECTOR. N O OUTSIDE MEMBERS ARE INVOLVED IN THE COMPANY EXCEPT THE FAMILY MEMBERS OF TH E MANAGING DIRECTOR. IT IS OBSERVED THAT T HE MANAGING DIRECTOR HAS OFFERED THE INCOME IN HIS HANDS AND PAID THE TAXES THEREON. MERELY BECAUSE LOSSES WERE SET OFF 7 I.T.A. NO. 627/VIZ/2019, A.Y.2016 - 17 M/S TULASI COTTON INDUSTRIES PVT. LTD., GUNTUR AGAINST THE INCOME, IT CANNOT BE CONCLUDED THAT THE PAYMENT OF REMUNERATION IS A COLORABLE DEVICE. I NCORRECT ALLOWANCE OF LOSS ALSO IS HAVING POTENTIAL TAX EFFECT , THUS THE RED UC ING THE LOSS IS PERMITTED AS PER LAW AND THE SAME CANNOT BE EQUATED WITH COLOURABLE DEVICE. SINCE THE COMPANY FELT THAT REMUNERATION PAID TO THE MANAGING DIRECTOR WAS RE ASONABLE, BURDEN SHIFTS ON THE REVENUE TO MAKE OUT A CASE OF FAIR VALUE OF REMUNERATION WITH REFERENCE TO IDENTICAL FACTS AND COMPARABLE CASES APROPOS TO THE SERVICES RENDERED BY THE MANAGING DIRECTOR. NO SUCH EXERCISE WAS MADE BY THE AO. THEREFORE, WE HO LD THAT THE LD. CIT(A) ERRED IN UPHOLDING THE DECISION OF THE AO IN CONFIRMING THE ADDITION, HENCE, WE SET ASIDE THE ORDER OF THE LD.CIT(A) AND DELETE THE ADDITION MADE BY THE AO. 7.1. IN ADDITION TO THE ABOVE, AS OBSERVED FROM THE ORDER OF THE AO, THE C ASE WAS SELECTED FOR SCRUTINY FOR LIMITED PURPOSE OF VERIFYING WHETHER THE DEDUCTION CLAIMED ON ACCOUNT OF BUSINESS LOSS IS ADMISSIBLE OR NOT. THE AO DID NOT MAKE ANY DISCUSSION ON THE DEDUCTIBILITY OR OTHERWISE OF LOSSES AND EXAMINED THE REASONABLENESS O F REMUNERATION PAID TO THE MANAGING DIRECTOR WHICH IS BEYOND THE JURISDICTION OF THE AO AS PER THE SCRUTINY G UIDELINES. IN CASE THE AO INTENDS TO EXAMINE THE ISSUE, THE AO OUGHT TO HAVE CONVERTED THE CASE INTO COMPLETE SCRUTINY, AFTER OBTA INING THE 8 I.T.A. NO. 627/VIZ/2019, A.Y.2016 - 17 M/S TULASI COTTON INDUSTRIES PVT. LTD., GUNTUR APPROV AL FROM THE PR. CIT OR CCIT AS APPLICABLE. NO SUCH APPROVAL WAS OBTAINED BY THE AO BEFORE GOING INTO THE DETAILS OF REASONABLENESS OF REMUNERATION PAID TO THE MANAGING DIRECTOR. THEREFORE ON THIS ISSUE ALSO ASSESSEES APPEAL DESERVES TO BE ALLOWED . 8 . IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD NOVEMBER 2020. SD/ - SD/ - ( . ) ( . . ) (V. DURGA RAO) ( D.S. SUNDER SINGH ) /JUDICIAL MEMBER /ACCOUNTANT MEMBER /VISAKHAPATNAM /DATED : 23.11.2020 L.RAMA, SPS 9 I.T.A. NO. 627/VIZ/2019, A.Y.2016 - 17 M/S TULASI COTTON INDUSTRIES PVT. LTD., GUNTUR / COPY OF THE ORDER FORWARDED TO : - 1. / THE ASSESSEE E M/S TULASI COTTON INDUSTRIES PVT. LTD., RAJ KAMAL COMPLEX, LAKSHMIPURAM MAIN ROAD, ASHOK NAGAR, GUNTUR 2 . / THE REVENUE ASST. COMMISSIONER OF INCOME TAX, CIRCLE - 2(1), GUNTUR 3. THE PR.COMMISSIONER OF INCOME TAX , GUNTUR 4. THE COMMISSIONER OF INCOME TAX (APPEALS) - 1 , GUNTUR 5 . , , / DR, ITAT, VISAKHAPATNAM 6 . / GUARD FILE / BY ORDER // TRUE COPY // SR. PRIVATE SECRETARY ITAT, VISAKHAPATNAM