Appeal Details
Counselvise Citation
[2012] 140 COUNSELVISE.COM (IT) 63785 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 5 month(s) 16 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
16-11-2012
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
C
Next Hearing Date
13-11-2012
Assessment Year
2007-2008
Appeal Filed On
30-05-2011
Judgement Text
PAGE 1 OF 9 ITA NO.6 28/BANG/2011 1 IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH C BEFORE SHRI GEORGE GEORGE K, JUDICIAL MEMBER AND SHRI JASON P BOAZ, ACCOUNTANT MEMBER ITA NO.628/BANG/2011 (ASST. YEAR 2007-08) M/S JUPITER TECHNOLOGIES PRIVATE LIMITED, NO.67, 1 ST A MAIN ROAD, S T BED, KORAMANGALA, BANGALORE-560034. PA NO.AAACJ 4137 A VS THE ASST. COMMISSIONER OF INCOME-TAX. CIRCLE-11(5), BANGALORE. (APPELLANT) (RESPONDENT) DATE OF HEARING : 13.11.2012 DATE OF PRONOUNCEMENT : 16.11.2012 APPELLANT BY : SHRI RAMASUBRAMANYAN, C.A. RESPONDENT BY : SHRI A SUNDAR RAJAN, JCIT OR DER PER GEORGE GEORGE K : THIS APPEAL AT THE INSTANCE OF THE ASSESSEE IS DI RECTED AGAINST THE ORDER OF THE CIT(A)-I, BANGALORE DATED 01.03.20 11. THE RELEVANT ASSESSMENT YEAR IS 2007-08. 2. THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE BUSINESS OF TRADING IN HOT-STAMPING FOILS, HOLOGRAMS, LABELS, D ATA TAPES ETC. FOR THE ASSESSMENT YEAR 2007-08, IT FILED ITS RETURN OF INCO ME ON 31.10.2007 DECLARING AN INCOME OF RS.73,65,280/-. THE ASSESSM ENT WAS TAKEN UP FOR PAGE 2 OF 9 ITA NO.6 28/BANG/2011 2 SCRUTINY BY ISSUANCE OF NOTICE UNDER SECTION 143(2) O F THE ACT. THE SCRUTINY ASSESSMENT UNDER SECTION 143(3) OF THE ACT WAS COMP LETED VIDE ORDER DATED 24.11.2009 FIXING THE TOTAL INCOME AT RS.92,15,280/ -. THE ASSESSING OFFICER ADDED A SUM OF RS.18,50,000/- UNDER SECTION 40A(2) OF THE ACT BEING DIRECTORS REMUNERATION PAID AND DEBITED TO P&L ACCO UNT. 2.1 THE BRIEF FACTS IN RELATION TO THE ABOVE DISAL LOWANCE ARE AS UNDER:- DURING THE YEAR ENDING 31 ST MARCH, 2007, THE ASSESSEE COMPANY PAID SALARY TO THE DIRECTORS AS PER THE DETAILS GIVE N BELOW:- AMOUNT IN RS. MR. NANDKISHORE KULKARNI 36,00,000 MRS. GOURI KULKARNI 24,00,000 MS. MALTHI KULKARNI 6,00,000 TOTAL 66,00,000 FOR THE YEAR ENDING 31 ST MARCH, 2006, THE SALARY PAID TO THE ABOVE PERSONS WERE RS.18 LAKHS, RS.12 LAKHS AND RS.6 LAKHS RESPEC TIVELY TOTALING TO RS.36 LAKHS. THE ASSESSING OFFICER HELD THAT THE TURNOVE R FOR THE CONCERNED ASSESSMENT YEAR 2007-08 OF THE ASSESSEE COMPANY HAD I NCREASED BY 32% AS COMPARED TO THE ASSESSMENT YEAR 2006-07 AND THEREFOR E, THE SALARY PAID THE DIRECTORS NEED TO BE INCREASED ONLY BY 32%. AS THE SALARY PAID DURING THE ASSESSMENT YEAR 2007-08 WAS RS.66 LAKHS, HE ALLO WED A SUM OF RS.47.5 LAKHS AND THE BALANCE OF RS.18.5 LAKHS WAS DISALLOW ED. 3. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN A PPEAL BEFORE THE FIRST APPELLATE AUTHORITY. PAGE 3 OF 9 ITA NO.6 28/BANG/2011 3 4. IT WAS SUBMITTED THAT IT IS NOT CORRECT TO ALLO W INCREASE IN REMUNERATION IN PROPORTION TO INCREASE IN TURNOVER. IT WAS CONTENDED THAT THE NET PROFIT FOR THE YEAR ENDING 31 ST MARCH, 2007 WAS RS.79.42 LAKHS COMPARED TO RS.37.42 LAKHS FOR THE YEAR ENDING 31 ST MARCH, 2006; HENCE, THERE WAS AN INCREASE IN THE NET PROFIT BY 129%. IT WAS FURTHER SUBMITTED THAT THE ACTUAL INCREASE IN TURNOVER IS NOT 32% BUT 43% AS TURNOVER HAS INCREASED FROM 641.22 LAKHS TO 918.85 LAKHS. IT WA S STATED THAT THE DIRECTORS WAS NOT DRAWING REMUNERATION IN COMMENSUR ATE TO THEIR QUALIFICATIONS AND EFFORTS IN THE PREVIOUS YEARS DUE TO LOW KEY OPERATIONS AND FINANCIAL POSITION OF THE ASSESSEE. DUE TO CON SISTENT EFFORTS PUT IN BY THE DIRECTORS, THE ASSESSEE REACHED A COMFORTABLE F INANCIAL POSITION. THEREFORE, TAKING INTO ACCOUNT THE FINANCIAL POSITI ON OF THE COMPANY AND EXTRA EFFORTS PUT BY THE DIRECTORS, THE REMUNERATION WAS INCREASED FROM RS.36 LAKHS IN ASSESSMENT YEAR 2006-07 TO RS.66 LAKH S IN ASSESSMENT YEAR 2007-08. 5. THE CIT(A) DID NOT AGREE WITH THE CONTENTION OF THE ASSESSEE COMPANY AND DISMISSED THE APPEAL OF THE ASSESSEE. 6. THE ASSESSEE BEING AGGRIEVED IS IN APPEAL BEFOR E US RAISING THE FOLLOWING GROUNDS OF APPEAL:- I) THAT THE ORDER OF THE AUTHORITIES BELOW FOR THE ASSESSMENT YEAR 2007-08 IN SO FAR AS THEY ARE PRE- JUDICIAL TO THE INTERESTS OF THE APPELLANT IS BAD A ND ERRONEOUS IN LAW AND AGAINST THE FACTS AND CIRCUMST ANCES OF THE CASE. PAGE 4 OF 9 ITA NO.6 28/BANG/2011 4 II) THAT THE CIT(A) ERRED IN LAW AND ON FACTS IN HOLDIN G THAT THE REMUNERATION OF RS.66 LAKHS PAID TO DIRECTORS I S EXCESSIVE, IGNORING THE QUALIFICATION AND EXPERIENC E OF DIRECTORS, THE INCREASE IN TURNOVER AND THE NET PRO FITS OF THE APPELLANT COMPANY. III) THAT THE CIT(A) ERRED IN LAW AND ON FACTS IN HOLDIN G THAT THE ASSESSING OFFICER NEED NOT ESTABLISH THE FAIR S ALARY PAYABLE TO DIRECTORS, TAKING INTO ACCOUNT THE MARKET CONDITIONS. IV) THAT THE LEARNED CIT(A) ERRED IN LAW AND ON FACTS I N NOT DECIDING THE GROUND REGARDING THE INCREASE IN QUANT UM OF TURNOVER ON THE GROUND THAT SUCH PLEA WAS NOT TAKEN BEFORE THE LEARNED ASSESSING OFFICER. 7. IT WAS SUBMITTED THAT THE DIRECTOR MR. NANDA KI SHORE KULKARNI WAS A GRADUATE FROM IIM CALCUTTA AND HIS SALARY FOR THE CONCERNED YEAR WAS COMMENSURATE TO THE EFFORTS TAKEN BY HIM FOR COMPLET ELY REVAMPING THE BUSINESS MODEL FROM BEING A MERE PROCESSOR TO A FUL L-FLEDGED MANUFACTURER OF HOLOGRAMS. IT WAS CONTENDED THAT DUE TO THE EFF ORTS PUT IN BY THE DIRECTOR FOR THE ASSESSMENT YEAR 2007-08, THE TURNOV ER HAD DRASTICALLY INCREASED IN THE SUBSEQUENT YEARS. IT WAS SUBMITTED THAT THE DIRECTORS WERE FULLY QUALIFIED FOR LOOKING AFTER THE COMPLETE BUSINESS INCLUDING PLANNING, EVOLVING STRATEGIES AND EXECUTION OF DAY T O DAY MANAGEMENT. IN THE EARLIER YEARS, IT WAS SUBMITTED, THE DIRECTORS W ERE NOT DRAWING REMUNERATION COMMENSURATE WITH THEIR QUALIFICATION AND EXPERIENCE DUE TO LOW KEY OF THE OPERATIONS OF THE ASSESSEE COMPANY. I T WAS SUBMITTED THAT THE FINANCIAL POSITION OF THE ASSESSEE IN THE EARLI ER YEARS DID NOT PERMIT THE PAYMENT OF SALARY COMMENSURATE WITH QUALIFICATIONS AN D EFFORTS PUT IN BY THE DIRECTORS. PAGE 5 OF 9 ITA NO.6 28/BANG/2011 5 7.1 THE LEARNED COUNSEL FURTHER CONTENDED THAT THE INCOME-TAX AUTHORITIES HAVE NOT CONDUCTED PROPER ENQUIRY TO DET ERMINE WHETHER THE REMUNERATION PAID TO DIRECTORS IS EXCESSIVE OR NOT. IT WAS SUBMITTED THAT UNLESS THE AUTHORITIES COME TO A CATEGORICAL FINDIN G, THE PAYMENT MADE IS EXCESSIVE IN REGARD TO THE FAIR MARKET VALUE OF SER VICES, DISALLOWANCE UNDER SECTION 40A(2) CANNOT BE MADE. FOR THE ABOVE PROPO SITION, THE LEARNED COUNSEL RELIED ON THE ORDERS OF THE TRIBUNAL IN THE CASE OF JAGADAMA ROLLER FLOUR MILLS LTD. V AC IT (316 ITR (AT) 422 AND DCIT V MGS HOSPITALITIES (2011) (5 TAXCORP (AT) 24634). LASTLY IT WAS SUBMIT TED THAT THE EMPLOYEES SALARY FOR ASSESSMENT YEAR 2007-08 HAD COME DOWN TO R S.9.52 LAKHS FROM RS.11.06 LAKHS IN ASSESSMENT YEAR 2006-07 ONLY ON AC COUNT THAT MANY OF THE EMPLOYEES LEFT THE SERVICES OF THE ASSESSEE DURING T HE CONCERNED ASSESSMENT YEAR 2007-08 AND THE VACANCIES WERE NOT F ILLED IMMEDIATELY DURING THE YEAR. IT WAS STATED THAT THIS IS A MAJO R REASON FOR THE FALL IN THE SALARIES AND HENCE, THE REASONING OF THE CIT(A) TO UPHOLD THE ASSESSMENT IS NOT JUSTIFIED. 8. THE LEARNED DR SUPPORTED THE STAND OF THE INCOM E TAX AUTHORITIES. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS ON RECORD. THE ONLY ISSUE FOR OUR CONSIDERATION IS WHETHER THE REMUNERATION PAID TO THE DIRECTORS IS JUSTIFIED OR NOT. THE ASSESSING OFFICER DISALLOWED A SUM OF RS.18,50,000/- UNDER SE CTION 40A(2) HOLDING THAT INCREASE IN TURNOVER FOR THE CURRENT ASSESSMEN T YEAR IS ONLY 32% AND INCREASE IN REMUNERATION PAID TO THE DIRECTORS SHOU LD BE IN PROPORTION TO PAGE 6 OF 9 ITA NO.6 28/BANG/2011 6 INCREASE IN TURNOVER. THE CIT(A) HAS CONFIRMED THE ORDER OF THE ASSESSING OFFICER. THE TURNOVER FOR THE ASSESSMENT YEAR 2006- 07 WAS RS.641.22 LAKHS WHEREAS THE TURNOVER FOR THE CURRENT ASSESSME NT YEAR WAS RS.918.85 LAKHS. FOR THE SAME PERIOD, THE NET PROFIT INCREAS ED FROM RS.37.42 LAKHS FOR THE YEAR ENDING 31/3/2006 TO RS.79.42 LAKHS FOR THE YEAR ENDING 31/3/2007. THUS, THERE IS AN INCREASE IN THE NET P ROFIT AS COMPARED TO LAST YEAR TO THE TUNE OF 129%. 9.1 IT IS THE CASE OF THE ASSESSEE THAT DIRECTORS ARE QUALIFIED AND EXPERIENCED AND ONE OF THEM IS A GRADUATE FROM IIM, CALCUTTA. IT WAS SUBMITTED THAT IN THE COURSE OF HEARING THAT THE DI RECTORS WERE LOOKING AFTER THE COMPLETE BUSINESS INCLUDING PLANNING, EVO LVING STRATEGIES, EXECUTION AND DAY TO DAY MANAGEMENT OF THE ASSESSEE COMPANY. TH E COMPANY WAS FORMED IN THE FINANCIAL YEAR 1995 AND SINCE ITS INCE PTION; THE DIRECTORS WERE NOT DRAWING REMUNERATION COMMENSURATE WITH THEIR QU ALIFICATION AND WORK DUE TO THE LOW KEY OF THE OPERATIONS AND FINANCIAL P OSITION OF THE ASSESSEE COMPANY. IT WAS CONTENDED THAT THE TURNOVER HAD INC REASED FROM 6.41 CRORES FOR THE FINANCIAL YEAR 2005-06 TO RS.16.12 CR ORES FOR THE FINANCIAL YEAR 2011-12. THESE FACTS HAVE NOT BEEN CONTROVERTE D BY THE REVENUE. 9.2 ACCORDING TO US, THE AUTHORITIES HAVE NOT COND UCTED PROPER ENQUIRY TO DETERMINE WHETHER THE REMUNERATION PAID T O THE DIRECTORS IS EXCESSIVE OR NOT HAVING REGARD TO THE FAIR MARKET V ALUE FOR THE SERVICES RENDERED BY THE DIRECTORS. THE TRIBUNAL IN THE CAS E OF JAGADAMBA ROLLER FLOUR MILLS LTD. V ACIT (316 ITR (AT) 422) (AT PAGE 432) HAD HELD THAT IT IS NOT CORRECT TO COMPARE THE CURRENT YEAR SALARY WITH T HE SALARY IN THE EARLIER PAGE 7 OF 9 ITA NO.6 28/BANG/2011 7 YEAR. IT WAS HELD BY THE TRIBUNAL THAT THE ONUS IS O N THE ASSESSING OFFICER TO BRING THE MATERIAL ON RECORD TO PROVE THAT THE P AYMENT IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE . IT WAS FURTHER HELD BY THE TRIBUNAL THAT WITHOUT DETERMINING THE FAIR MARK ET VALUE OF THE SERVICES, THE DISALLOWANCE UNDER SECTION 40A(2) CANNOT BE MAD E. THE RELEVANT FINDING OF THE TRIBUNAL IN THE CASE CITED SUPRA READS AS FO LLOWS:- UNDISPUTEDLY, THE PAYMENT TO THE DIRECTOR FALLS UNDE R CLAUSE (B) OF SECTION 40A OF THE ACT AND, THEREFORE , THE ASSESSING OFFICER WAS DUTY BOUND TO MAKE ENQUIRY WHETHER SUCH EXPENDITURE WAS EXCESSIVE OR UNREASONA BLE HAVING REGARDING TO THE FAIR MARKET VALUE OF THE SE RVICES RENDERED. TO THAT EXTENT, I AM IN AGREEMENT WITH T HE OBSERVATIONS OF THE LEARNED ACCOUNTANT MEMBER. HOWEVER, NO ENQUIRY WAS MADE BY THE ASSESSING OFFICER TO ASCERTAIN WHETHER THE PAYMENT WAS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE SERVICES. ON THE OTHER HAND, THE ASSESSING OFF ICER MADE THE ENQUIRY IN A DIFFERENT DIRECTION, I.E. WHET HER THE INCREASE IN THE SALARY AS COMPARED TO THE SALARY PAID TO LAST YEAR WAS JUSTIFIED ON FACTS OR NOT. SUCH EN QUIRY, IN MY VIEW, IS NOT REQUIRED TO BE MADE AS PER THE PROVISIONS OF SECTION 40A(2)(A). THE SCOPE OF ENQU IRY UNDER THE ABOVE PROVISION IS WITH REFERENCE TO THE FAIR MARKET VALUE OF THE SERVICES RENDERED. IN THE ABSE NCE OF ENQUIRY AS CONTEMPLATED BY THE PROVISIONS OF SECTI ON 40A(2)(A), NO DISALLOWANCE COULD HAVE BEEN MADE OR SUSTAINED. THE ONUS WAS ON THE ASSESSING OFFICER T O BRING THE MATERIAL ON RECORD TO PROVE THAT THE PAYME NT MADE BY THE ASSESSEE WAS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE SERVI CES RENDERED. IF SOME MATERIAL/EVIDENCE IS BROUGHT ON RECORD TO INDICATE THAT PAYMENT APPEARED TO BE EXCESSIVE OR UNREASONABLE THEN THE ONUS WOULD SHIFT TO THE ASSESSEE TO PROVE THAT THE PAYMENT WAS NOT PAGE 8 OF 9 ITA NO.6 28/BANG/2011 8 EXCESSIVE OR UNREASONABLE. SINCE NO ENQUIRY AS CONTEMPLATED BY THE AFORESAID PROVISIONS WAS MADE ON THIS ACCOUNT, IT CANNOT BE SAID THAT THE PAYMENT WAS EXCESSIVE OR UNREASONABLE. 9.3 THE TRIBUNAL IN THE CASE OF DCIT M/S MGS HOSPI TALITIES (ITA NOS.2415 & 2416/DEL/2010 DATED 19 TH NOVEMBER, 2010) (5 TAXCORP (AT) 24634) HAS HELD THAT IN THE ABSENCE OF ANY EVIDENCE REGARDING THE FAIR MARKET VALUE OF THE SERVICES RENDERED BY A FIRM WAS LESS THAN THE ACTUAL AMOUNT PAID TO HIM, THE DISALLOWANCE UNDER SECTION 40A(2) CANNOT BE MADE. IN THE LIGHT OF THE ABOVE ORDERS OF THE TRIBUNAL, T HE ASSESSING OFFICER HAS TO DETERMINE THE FAIR MARKET VALUE OF THE SERVICES AND ALLOW SUCH FAIR MARKET VALUE OF SERVICES. SINCE THE INCOME-TAX AUT HORITIES HAVE NOT BROUGHT ON ANY MATERIAL TO PROVE WHAT THE FAIR MARKE T VALUE OF THE SERVICES, THE DISALLOWANCE UNDER SECTION 40A(2) IS NOT JUSTIF IED. 9.4 ANOTHER IMPORTANT REASON FOR THE CIT(A) TO CON FIRM THE DISALLOWANCE MADE BY THE ASSESSING OFFICER WAS THAT THE SALARY PAID TO THE OTHER EMPLOYEES HAD COME DOWN TO RS.9.52 LAKHS FOR T HE CURRENT ASSESSMENT YEAR FROM RS.11.6 LAKHS, INCURRED IN THE ASSESSMENT YEAR 2006-07. WE HAVE PERUSED THE DETAILS OF THE SALARY PAID TO VARIOUS EM PLOYEES FOR THE ASSESSMENT YEAR 2006-07 AND FOR THE CURRENT ASSESSME NT YEAR NAMELY 2007-08. IT IS TO BE MENTIONED HERE THAT THE SALAR Y FOR ALL THE EMPLOYEES INCREASED IN THE CURRENT ASSESSMENT YEAR, EXCEPT FOR ONE EMPLOYEE, NAMELY, SOWMYA. IT IS NOT CLEAR WHETHER SHE HAS LEFT THE SE RVICE OF THE ASSESSEE COMPANY DURING THE CURRENT ASSESSMENT YEAR WHICH HAD RESULTED IN REDUCTION IN HER SALARY. THE TOTAL SALARY OUTGOING FOR THE CUR RENT ASSESSMENT YEAR IS PAGE 9 OF 9 ITA NO.6 28/BANG/2011 9 LOWER THAN THE ASSESSMENT YEAR 2006-07 ONLY ON ACCOUN T THAT MANY OF THE EMPLOYEES HAD LEFT THE SERVICES DURING THE CURRENT A SSESSMENT YEAR AND THE ASSESSEE COMPANY HAD NOT FILLED THE VACANCIES IMMEDI ATELY. IN THE LIGHT OF THE ABOVE REASONING, WE ARE OF THE VIEW THAT DISALL OWANCE OF REMUNERATION PAID TO THE DIRECTORS ON THE FACTS OF THIS CASE IS NOT JUSTIFIED AND ACCORDINGLY, WE REVERSE THE ORDER OF THE CIT(A) AND DIRECT THE ASSESSING OFFICER TO ALLOW THE ENTIRE SALARY PAID TO THE DIREC TORS. IT IS ORDERED ACCORDINGLY. 10. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 16 TH DAY OF NOVEMBER, 2012 SD/- SD/- (JASON P BOAZ) (GEORGE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBER COPY TO : 1. THE REVENUE 2. THE ASSESSEE 3. THE CIT CONCERNE D. 4. THE CIT(A) CONCERNED. 5. DR 6. GF MSP/ BY ORDER SENIOR PRIVATE SECRETARY, ITAT, BANGALORE.
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