ACIT 18(3), MUMBAI V. MIKU AGENCIES, MUMBAI

ITA 6335/MUM/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3947 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 31-12-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 14-09-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: O P SINGH
• Assessee Lawyers: AMIT PATEL
• Keywords: Additional evidence; Fair market value
• Section: 142(1)

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUMBAI BEFORE S/SHRI B.R.MITTAL,(JM) AND SANJAY ARORA (AM) . . , , & ./I.T.A. NO.6335/MUM/2011 ( / ASSESSMENT YEAR:2007-08) ASSTT. COMMISSIONER OF INCOME TAX-18(3), ROOM NO.209, 2 ND FLOOR, PIRAMAL CHAMBER, LALBAUG, PAREL, MUMBAI / VS. M/S MIKU AGENCIES, 403, UDYOG MANDIR NO.27-C, BHAGOJI KEER MARG, MAHIM (W), MUMBAI-400016 ./ ./PAN/GIR NO. : AAAFM2750P ( / APPELLANT) .. ( / RESPONDENT) / APPELLANT BY : SHRI O.P.SINGH /RESPONDENT BY : SHRI AMIT PATEL ' / DATE OF HEARING : 25.7.2013 ' /DATE OF PRONOUNCEMENT : 25.07.2013 / O R D E R PER B.R.MITTAL, JM: THE DEPARTMENT HAS FILED THIS APPEAL FOR ASSESSMENT YEAR 2007-08 AGAINST ORDER DATED 17.6.2011 OF LD CIT(A)-XXIX, MUMBAI ON THE F OLLOWING GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE CIT(A) HAS ERRED IN ALLOWING THE APPEAL OF THE ASSESSEE AN D DELETING THE DISALLOWANCES OF RS.18,52,876/- MADE UNDER SECTION 40A(2) OF THE IT ACT, 1961; 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS FAILED TO APPRECIATE THAT THE FAMILY MEMBERS OF THE PARTNERS HAVE BEEN PAID SALARIES AND OTHER INCENTIVES FAR MORE IN EXCESS TH AN THE OTHER EMPLOYEES WHO WERE EQUALLY OR MORE QUALIFIED AND HAVING EVEN MORE EXPERIENCE; 3. APPELLANT PRAYS THAT FOR THESE AND OTHER REASONS IT IS SUBMITTED THAT THE ORDER OF THE CIT(A) ON THE GROUNDS BE SET ASIDE AND THAT OF THE AO BE RESTORED 2. ASSESSEE IS A FIRM AND HAS FILED ITS E-RETUR N OF INCOME ON 29.10.2007 DECLARING TOTAL INCOME OF RS.1,74,19,160/-. THE ASSESSEE I S A 100% EXPORT ORIENTED ORGANIZATION (MERCHANT EXPORTERS) DEALING IN AUTO MOBILE SPARES AND ANCILLARIES BUYS I.T.A. NO.6335/MUM/2011 2 GOODS FROM VARIOUS MANUFACTURERS IN INDIA AND THEN PACKS THE GOODS IN ITS OWN PACKING MATERIAL WITH ITS OWN BRANDING AND THEN EXPORTS THE SAME TO ITS CUSTOMERS ALL OVER THE WORLD. THE CASE WAS SELECTED FOR SCRUTINY AND ACCO RDINGLY NOTICES U/S 143(2) AND 142(1) DATED 26.9.2008, 25.5.2009 AND 9.11.2009 RES PECTIVELY WERE ISSUED TO THE ASSESSEE. IN REPLY, AUTHORISED REPRESENTATIVE OF TH E ASSESSEE ATTENDED AND FURNISHED COMPUTATION OF TOTAL INCOME, BALANCE-SHEET WITH REL EVANT SCHEDULES, TRADING AND PROFIT AND LOSS ACCOUNT ETC. 3. DURING THE COURSE OF SCRUTINY PROCEEDINGS, ASSES SING OFFICER STATED THAT THE ASSESSEE HAS PAID EXCESS PAYMENTS IN VIOLATIONS OF SECTION 40A(2)(B) OF THE INCOME TAX ACT, 1962 AS UNDER : 1 PAYMENT TO SHRI AJAY BABLA (SON OF MR. J K BABLA, PARTNER) A. SALARY B. BONUS C. HOUSE RENT ALLOWANCE TOTAL 8,70,392 1,13,063 42,325 10,25,780 2 PAYMENT TO SHRI MINESH BABLA (SON OF MR. J K BABLA, PARTNER) A. SALARY B. BONUS C. HOUSE RENT ALLOWANCE TOTAL 8,70,392 1,13,063 42,325 10,25,780 3 PAYMENT TO MRS. NAYNA BABLA (WIFE OF MR. N K BABLA, PARTNER A. SALARY B. BONUS C. HOUSE RENT ALLOWANCE TOTAL 3,78,040 67,926 18,197 4,64,163 AO CALLED FOR THE EXPLANATION FROM THE ASSESSEE TO SHOW CAUSE AS TO WHY THESE PAYMENTS SHOULD NOT BE TREATED AS IN VIOLATION OF PROVISIONS OF SECTION 40A(2)(B) OF THE ACT AND BE NOT ADDED TO THE TOTAL INCOME OF THE ASS ESSEE. IN RESPONSE TO THE ABOVE SHOW CAUSE NOTICE, THE ASSESSEE VIDE LETTER DATED 1 8.11.2009 FURNISHED DETAILS OF DUTIES OF THE DIRECTORS AND NATURE OF WORK CARRIED OUT BY THEM. AO HAS REPRODUCED THE SAME AT PAGES 3 AND 4 OF ASSESSMENT ORDER. IN THE SAID REPLY, THE ASSESSEE TRIED TO JUSTIFY THE PAYMENTS MADE TO THE DIRECTORS AS COMPARED TO THE P AYMENTS MADE TO THE EMPLOYEES. IN THE ASSESSMENT ORDER, AO ALSO DISCUSSED THE DETA ILS OF SALARIES AND PAYMENTS MADE TO THE DIRECTORS AND OTHER EMPLOYEES. AO WAS NOT S ATISFY WITH THE EXPLANATION FURNISHED BY THE ASSESSEE AND BY INVOKING THE PROVISION OF S ECTION 40A(2)(B) OF THE ACT HELD THAT THE PAYMENT OF RS.14,000/- PER MONTH FOR SHRI AJ AY BABLA AND SHRI MINESH BABLA ON I.T.A. NO.6335/MUM/2011 3 ACCOUNT OF SALARY IS REASONABLE. ACCORDINGLY, HE D ISALLOWED EXCESS PAYMENT OF RS.14,04,784/- (RS.17,40,784 RS.3,36,000) ON ACCO UNT OF BOTH THESE EMPLOYEES AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. IN THE SAME MANNER, AO ALLOWED RS.12,000/- PER MONTH IN CASE, OF NAYANA BABLA AN D DISALLOWED EXCESS PAYMENT OF RS.2,34,040 (RS.3,78,040/- - RS.1,44,000). 3.1 IN RESPECT OF BONUS TO SHRI AJAY BABLA AND SHR I MINESH BABLA AND SMT.NAYANA BABLA, THE AO OBSERVED THAT THE PAYMENT OF BONUS IS NOT ACCORDING TO THE BONUS ACT WHICH IS PAYABLE ONLY AT 8.33%. THE PAYMENT OF BON US WAS TO BE MADE TO THESE DIRECTORS ONLY ONE MONTHS SALARY WHICH IS 28,000 + 28000 +24000 AGGREGATING TO RS.80,000/- WHEREAS THE ASSESSEE PAID RS.2,94,052/- WHICH IS EXCESSIVE. ACCORDINGLY, AO DISALLOWED RS.2,14,052/- ON ACCOUNT OF BONUS AN D ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. THEREFORE, AO DISALLOWED TOTAL AMO UNT OF RS.18,52,876/-. BEING AGGRIEVED, THE ASSESSEE FILED APPEAL BEFORE THE F IRST APPELLATE AUTHORITY. 4. BEFORE THE LD.CIT(A), THE ASSESSEE FILED WRITTEN SUBMISSIONS AND STATED THAT ASSESSEE HAD CLAIMED THE PAYMENTS GIVEN TO THE PERS ONS ARE MARKET ORIENTED AND AT PAR WITH THE CONTRIBUTION MADE BY THEM TO THE FIRM. AS SESSEE ALSO STATED THAT AN IDENTICAL ISSUE HAD COME UP BEFORE THE ITAT IN ASSESSEES OWN CASE IN AYS 2004-05 AND 2005-06 AND THE TRIBUNAL DELETED THE PART ADDITION CONFIR MED BY LD. CIT(A). THE ASSESSEE ALSO STATED THE SIMILAR ADDITIONS WERE ALSO DELETED BY T HE LD. CIT(A) IN AY 2006-07. 5. THE LD. CIT(A) ON CONSIDERATION OF ARGUMENTS OF THE PARTIES, AND PERUSAL OF WRITTEN SUBMISSIONS AND THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE OBSERVED AND HELD THAT ASSESSING OFFICER HAS NOT GIVEN ANY FIND ING TO PROVE THAT THE PAYMENTS ARE EXCESSIVE. HE ALSO DELETED THE ADDITIONS IN THE LA ST YEAR. THE LD. CIT(A) OBSERVED THAT REMUNERATION HAS GONE UP FROM RS.7,06,502/- TO RS.1 0,25,780/- IN THE CASE OF J K BABLA AND MINESH BABLA. ALTHOUGH, ASSESSEE HAS NOT EXPLA INED THE INCREASE IN REMUNERATION SUBSTANTIALLY, NO ADVERSE INFERENCE IS BEING DRAWN AS BOTH THE ENTITIES I.E. THE FIRM AND THE EMPLOYEES ARE IN HIGH TAX BRACKET. THE LD. CIT( A) HELD THAT THERE WILL BE NO REVENUE IMPACT IN TAXING THE AMOUNT EITHER IN THE HANDS OF THE FIRM OR IN THE HANDS OF THE RECIPIENTS. THE LD. CIT(A) HELD THAT THE EXPENSES TO BE GENUINE AND REASONABLE. HE ACCORDINGLY DELETED THE ADDITION OF RS.18,52,876/- . HENCE DEPARTMENT IS IN APPEAL BEFORE THE TRIBUNAL. 6. LD. DEPARTMENTAL REPRESENTATIVE REITERATED THE F ACTS AND RELIED ON THE ORDER OF AO. I.T.A. NO.6335/MUM/2011 4 7. LD. AR HAS STATED THE FACTS OF THE CASE AND REL IED ON THE ORDER OF LD. CIT(A). HE ALSO SUBMITTED THAT THE SIMILAR ISSUE HAD COME UP BEFORE THIS TRIBUNAL IN ASSESSEES OWN CASE IN DCIT V/S M/S MIKU AGENCIES IN ITA NO.5 876/MUM/2009 (AY2006-07) DATED 23.7.2010 AND THE TRIBUNAL UPHELD THE ORDER OF LD .CIT(A) IN DELETING THE ADDITION OF RS.12,46,308/-. THE LD. AR, THEREFORE, SUBMITTED TH AT THE FACTS OF THE PRESENT CASE AND DECIDED BY THE TRIBUNAL ARE SAME AND HENCE THE ORDE R OF THE LD. CIT(A) DELETING THE ADDITION OF RS. 18,52,876/- BE CONFIRMED. 8. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF LD. REPRESENTATIVES OF THE PARTIES AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THE SIMILAR ISSUE HAD COME UP BEFORE THIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 2004-05, 2005-06 AND 2006-07 AND THE TRIBUNAL VIDE ORDER DATED 23.7.2010 PASSED IN ITA NO.5876/MUM/2009 (AY-2006-07) HAS OBSERVED AND HELD AS UNDER : 3. THE MUMBAI BENCH B-1 OF THE TRIBUNAL IN THE A SSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2004-05, VIDE ITA NO. 6074/MUM/ 2007, ORDER DATED 13.04.2009, HAD DELETED SIMILAR ADDITION MADE UNDER SECTION 40A(2)(B) AT PARAS 13 AND 14 (PAGE 8) OF THAT ORDER WHICH READ AS UNDE R: 13. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RELEVANT ORDERS AS WELL AS EVIDENCES AVAILABLE ON THE RECORD S. SO FAR AS THE OBJECTIONS OF THE DR ARE CONCERNED, ON THE ADMISSIB ILITY OF THE NOTE, WE ARE OF THE CONSIDERED OPINION, THE SAID NO TE MERELY CONTAINS THE ANALYSIS AND SUBMISSIONS AND DOES NOT CONSTITUTE ADDITIONAL EVIDENCE. THEREFORE, THE QUESTION OF REFERRING THIS DOCUMENT TO THE AO IS UNWARRANTED. REGARDING COMPA RABLES BY THE AO, WE ARE OF THE CONSIDERED OPINION THAT THE SAID PROVISIONS ARE CENTRED AROUND THE FAIR MARKET VALUE OF GOODS , SERVICES OR FACILITIES AND IT EXPECTED THAT THE COMPARABLE FROM THE OPEN MARKET SHOULD HAVE BEEN PICKED UP. IN THIS REGARD, WE HAVE PERUSED THE PROVISIONS OF SECTION 40A(2)(B) AND FIN D THAT THESE PROVISIONS PROVIDE FOR CONSIDERING ONLY THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES. FOR THE SAKE OF CONVENIENCE RELEVANT PROVISIONS ARE REPRODUCED AS UNDER:- 40A2(A):- WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN RESPEC T OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERS ON REFERRED TO IN CLAUSE (B) OF THIS SUB-SECTION, AND THE ASSESSING OFFICER IS OF OPINION THAT SUCH EXPENDITU RE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS O F THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEF IT DERIVED BY OR ACCRUING TO HIM THEREFROM, SO MUCH OF THE EXPENDITURE IS SO CONSIDERED BY HIM TO BE EXCESSIV E OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. I.T.A. NO.6335/MUM/2011 5 14. FROM THE ABOVE, IT IS EVIDENT THAT UNDISPUTEDLY , ANY EXPENDITURE, WHICH IS EXCESSIVE AND UNREASONABLE, SHOULD BE ALLOWED. AT THE SAME TIME, HOW TO DETERMINE SUCH D ISALLOWABLE EXPENSES. THE ANSWER IS THAT IT HAS TO BE ONLY AS P ER THE ABOVE SAID PROVISIONS OF SECTION 40A(2)(A). ACCORDINGLY, THE SAME IS DETERMINED AFTER HAVING REGARD TO THE FAIR MARKET V ALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OR B ENEFITS DERIVED BY OR ACCRUED TO THE ASSESSEE. AS SEEN FROM THE REC ORDS, AO HAS NOT UNDERTAKEN THIS EXERCISE IN TRUE MEANING OF THE PROVISIONS. IT IS ALSO RELEVANT TO MENTION THAT NO SUCH DISALLOWAN CES WERE MADE IN THE PAST. UNDER THESE CIRCUMSTANCES, WE ARE OF THE CONSIDERED OPINION THAT THE SAID PROVISIONS HAVE NOT BEEN PROP ERLY APPLIED FOR MAKING THE DISALLOWANCE U/S.40A(2) AND THEREFORE, T HE ORDER OF THE CIT(A) IS SET ASIDE IN THIS REGARD AND THE CLAI M OF THE ASSESSEE IS ALLOWED. ACCORDINGLY, GROUND OF THE ASSESSEE IS ALLOWED. RESPECTFULLY FOLLOWING THE DECISIONS OF THE CO-ORD INATE BENCH OF THE TRIBUNAL AND TO MAINTAIN CONSISTENCY WITH THE SAME, WE CONFIRM THE ORDER OF THE LD. CIT(A) IN DELETING THE ADDITION OF RS.18,52,876/-. 9. IN THE RESULT, APPEAL OF THE DEPARTMENT IS DISM ISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH JULY, 2013 . ' ) * 25TH, JULY 2013 SD SD/- ( /SANJAY ARORA) ( . . / /B.R.MITTAL) / ACCOUNTANT MEMBER ' / JUDICIAL MEMBER MUMBAI; * DATED 25/ 07/2013 . . ./ PARIDA , SR. PS ) *+ ,+ / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. 0 ( ) / THE CIT(A)- 4. 0 / CIT 5. 1 3 , ' 3 , / DR, ITAT, MUMBAI 6. / GUARD FILE. / BY ORDER, TRUE COPY (ASSTT. REGISTRAR) , / ITAT, MUMBAI