ACIT, Circle - 32, Kolkata, Kolkata V. M/s. Matador Services, Kolkata

ITA 722/KOL/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 87626 (ITAT-KOLKATA)
• Duration Of Justice: 3 year(s) 8 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-01-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2007-2008
• Appeal Filed On: 10-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY
• Assessee Lawyers: ARVIND AGARWAL
• Keywords: Business income; Business expenditure; Fair market value; Commercial expediency
• Section: 14A

Judgement Text

I.T.A. NO . 722 / KOL ./20 11 ASSESSMENT YEAR: 200 7 - 20 0 8 PAGE 1 OF 9 IN THE INCOME TAX APPELLATE TRIBUNAL, KOLKATA C BENCH, KOLKATA BEFORE SHRI MAHAVIR SINGH (JUDICIAL MEMBER) AND SHRI SHAMIM YAHYA (ACCOUNTANT MEMBER) I.T.A. NO. 722 / KOL / 20 11 ASSESSMENT YEAR : 200 7 - 20 0 8 ASSISTANT COMMISSIONER OF INCOME TAX, ... ..... ........ .. .APP ELL ANT CIRCLE - 32 , KOLKATA, 10B, MIDDLETON ROW, 2 ND FLOOR, KOLKATA - 700 0 71 - VS. - M/S. MATADOR SERVICES,....................... ... ... ... ... . RESPONDENT 25B, PARK STREET, KOLKATA - 700 0 1 6 [PAN : A A EFM 4792 P ] APPEARANCES BY: S HRI S ANJAY , JCIT, SR. D.R., FOR THE DEPARTMENT SHRI ARVIND AGARWAL, ADVOCATE , FOR THE ASSESSEE DATE OF CONCLUDING THE HEARING : JANUARY 1 4 , 2 01 5 DATE OF PRONOUNCING THE ORDER : JANUARY 28 , 201 5 O R D E R PER SHAMIM YAHYA : THIS IS AN APPEAL FILED B Y THE REVENU E AGAINST THE ORDER OF LD. COMMISSIONER OF INCOME TAX (APPEALS) - XIX , KOLKATA IN APPEAL NO. 87 / CIT(A) - XIX / CIR - 32/KOL/ 0 9 - 10 DATED 15 . 0 2 .20 11 FOR THE ASSESSMENT YEAR 200 7 - 0 8 . 2. WE NOTE THAT THERE IS A DELAY OF ONE DAY IN FILING OF THE APPEAL. UP ON HEARING BOTH THE LD. COUNSELS AND PERUSING THE MATERIAL AVAILABLE ON RECORD, WE ARE INCLINED TO CONDONE THE DELAY OF ONE DAY. ACCORDINGLY, THE DELAY IS CONDONED AND THE APPEAL IS ADMITTED. I.T.A. NO . 722 / KOL ./20 11 ASSESSMENT YEAR: 200 7 - 20 0 8 PAGE 2 OF 9 3 . THE GROUNDS OF APPEAL READ AS UNDER: - (1) THAT THE LD. CIT(A PPEALS) HAS ERRED IN LAW IN ALLOWING RELIEF IN RESPECT TO DISALLOWANCE U/S 40A(2)(B) WITHOUT CONSIDERATION OF THE MATERIAL BROUGHT ON RECORD. (2) THAT THE LD. CIT(APPEALS) HAS ERRED IN LAW IN ALLOWING RELIEF IN RESPECT TO DISALLOWANCE U/S 14A BY HOLDING THAT RULE 8D WAS APPLICABLE ONLY PROSPECTIVELY, DESPITE THE FACT THAT THE SAID RULE MERELY PROVIDED A MACHINERY TO COMPUTE DISALLOWANCES AS REQUIRED U/S 14A WHICH WAS EFFECTIVE FROM AY 2001 - 02. (3) THAT THE LD. CIT(A) S ORDER MAY BE REVERSED. 4. APROPOS GROUND NO.1; DISALLOWANCE UNDER SECTION 40A(2)(B), THE ASSESSEE - FIRM IS CONSTITUTED OF THREE PARTNERS, BEING ANIL K UMAR JHUNJHUNWALA, HUF, AND MS. VEDIKA & VIDHI JHUNJHUNWALA, DAUGHTERS OF SHRI ANIL K UMAR JHUNJHUNWALA, WHO IS THE KARTA OF THE PARTNER HUF. AN EXAMINATION OF THE BREAK - UP OF THE ANNUAL SALARY PAYMENTS AS PRODUCED ON REQUISITION REVEALED THAT, OUT OF THE TOTAL SALARY PAYOUTS OF RS.50,30,957/ - , THE ANNUAL S A LARY PAID TO SHRI ANIL KUMAR JHUNJHUNWALA, KARTA OF THE PARTNER HUF, AND SHRI K.P. JHUNJ HUNWALA, HIS FATHER, STOOD AT RS.24,00,000/ - AND RS.7,20,000/ - RESPECTIVELY. 5. ASSESSING OFFICER WAS OF THE OPINION THAT THE ABOVE PAYMENT WAS MADE TO THE PERSONS UNDER SECTION 40A(2)(B). THE ASSESSING OFFICER OPINED THAT THE ABOVE PAYMENT WAS EXCESSIVE . ASSESSING OFFICER MADE THE DISALLOWANCE IN THIS CASE BY HOLDING AS UNDER: - (A) THE FIRM IS ENGAGED IN THE BUSINESS OF REPAIRS AND SERVICING OF MOTOR CARS OF HYUNDAI MAKE, AND RELATED TRADE IN SPARE PARTS, ETC. IT RUNS ITS ACTIVITIES FROM TWO PRINCIPAL O UTLETS, BEING ONE FACTORY AT TILJALA, AND ANOTHER AT HOWRAH. HOWEVER, IT WAS STATED DURING HEARINGS THAT THERE WAS NO CONTRACT BETWEEN HYUNDAI MOTORS AND THE ASSESSEE - FIRM. ITS LINK WITH THE CAR MANUFACTURERS IS SEEN TO FLOW THROUGH A COMPANY M/S. J.J. AUT OMOTIVES LTD., WHICH IS A MAJOR SELLING AGENT OF HYUNDAI CARS IN BENGAL, AND IS A COMPANY IN WHICH PARTNERS OF THE FIRM AND THEIR FAMILY MEMBERS OF IMMEDIATE DIRECT ASCENDANCY HOLD 26.08% OF THE SHARES IN AGGREGATE. I.T.A. NO . 722 / KOL ./20 11 ASSESSMENT YEAR: 200 7 - 20 0 8 PAGE 3 OF 9 (B) THE ASSESSEE FIRM S RELATIONS WITH THE COMPANY IS CLOSE. THE BULK OF THE ASSESSEE FIRM S PURCHASES OF SPARE PARTS ARE SOURCED FROM THE SAID COMPANY, A MAJOR PART OF ITS SALES ALSO INVOLVES THE SAME COMPANY. THE FIRM ALSO USES THE PLANT AND MACHINERY OF M/S. J.J. AUTOMOTIVE LTD., AND REIMBUR SES THE RENT, MAINTENANCE AS WELL AS ELECTRICITY CHARGES LIABILITIES OF THE SAID COMPANY, FOR THE USE OF ITS HOWRAH WORKSHOP. THE FIRM HAS ALSO TAKEN ON RENT OUT ONE WORKSHOP IN TILJALA FROM M/S. J.J. INDUSTRIAL CORPORATION, YET ANOTHER GROUP CONCERN. AS M AY BE EXPECTED, THE COMPANY M/S. J.J. AUTOMOTIVE LTD., IS VASTLY SUPERIOR IN COMPARISON WITH THE ASSESSEE FIRM IN TERMS OF FUND INVESTED(OVER 18 CRORES), GROSS EARNINGS (OVER 93 CRORES), SPREAD OF ACTIVITIES, ETC. (C) FROM THE ANNUAL REPORT OF THE COMPANY , (PROCURED FOR PURPOSES OF THIS ASSESSMENT), IT IS SEEN THAT THE COMPANY NAMES ONLY TWO INDIVIDUALS AS BEING KEY MANAGEMENT PERSONNEL OF THE COMPANY, AND THEY ARE SHRI ANIL JHUNJHUNWALA, AND SHRI K.P. JHUNJHUNWALLA, BOTH DIRECTORS. YET, DESPITE THE EXPERI ENCE AND KNOWLEDGE THAT THE TWO PERSONS ARE STATED TO POSSESS, THE COMPANY PAID SHRI ANIL JHUNJHUNWALLA AN ANNUAL SALARY OF ONLY RS. 1 LAKH, WHILE SHRI K.P. JHUNJHUNWALLA WAS PAID ONLY RS.50,000/ - . (D) THUS, THE RELATION BETWEEN THE FIRM AND THE COMPANY I S TRULY SYMBIOTIC. ON THE ONE HAND, THE FIRM IS IN EFFECT A DOWN STREAM ANCILLARY BUSINESS OF THE COMPANY S BUSINESS, AND THE COMPANY PROVIDES THE FIRM BOTH WITH INFRASTRUCTURE, AS WELL AS SOURCE OF BUSINESS INCOME. ON THE OTHER HAND, THE FIRM PAYS SALARY TO THE TWO PERSONS WHO REPRESENT THE TOP MANAGEMENT OF THE COMPANY FAR IN EXCESS OF THE MODEST SUMS PAID BY THE FLAGSHIP COMPANY. IN COURSE OF THESE PROCEEDINGS, IT WAS CONTENDED THAT THE AMOUNTS RECEIVED BY THE TWO PERSONS WERE OFFERED FOR TAX IN THE HA NDS OF THE INDIVIDUAL, AND THUS NO TAX WAS AVOIDED. FURTHER, THE DISALLOWING THE AMOUNTS WOULD RESULT IN THE DOUBLE TAXATION OF THE AMOUNTS. THIS PLEA WAS CONSIDERED, BUT NOT FOUND ACCEPTABLE. TAXATION OF DIFFERENT ENTITIES CANNOT BE CLUBBED TOGETHER EXCE PT AS SPECIFICALLY PROVIDED FOR IN THE STATUE. FURTHER, DISALLOWANCE UNDER SECTION 40A(2)(B) DOES NOT DEBAR THE ASSESSEE FIRM FROM PAYING SPECIFIED PERSONS WHATEVER SUMS IT MAY DEEM FIT, IT ONLY PROVIDES THAT THE SAID PAYMENTS ARE NOT TO BE CONSIDERED DEDU CTIBLE BUSINESS EXPENSES IN THE HANDS OF THE FIRM. IN ANY CASE, SUCH A LOGIC WOULD RENDER ALL DISALLOWANCES UNDER SECTION 40A(2)(B) TO BE EXAMPLES OF DOUBLE TAXATION. I.T.A. NO . 722 / KOL ./20 11 ASSESSMENT YEAR: 200 7 - 20 0 8 PAGE 4 OF 9 IN VIEW OF THE FACTS AND THE CIRCUMSTANCES AS DISCUSSED, I HOLD THAT THE SALARIES PAID TO SHRI K.P. JHUNJHUNWALLA AND SHRI ANIL JHUNJHUNWALLA ARE EXCESSIVE AND THEREFORE, NOT ALLOWABLE AS BUSINESS EXPENSE IN TERMS OF SECTION 40A(2)(B) OF THE ACT. IN CONSIDERATION OF THE FACT THAT SHRI K.P. JHUNJHUNWALLA PERFORMS ONLY ADVISORY SERVICE IN TH E FIRM, AND IN VIEW OF THE FACT THAT THE BUSINESS OF THE FIRM DOES NOT INVOLVE ANY SUBSTANTIAL BUSINESS PROCESSES OR ACQUISITIONS, MANOEUVRING ETC. I AM OF THE CONSIDERED OPINION THAT A SUM OF RS.2,40,000/ - IS REASONABLE AS SALARY TO SHRI K.P. JHUNJHUNWALL A. FURTHER, IN VIEW OF SHRI ANIL JHUNJHUNWALLA S POSITION IN THE ADMINISTRATIVE AND TECHNICAL HIERARCHY OF THE FIRM AS THE CHIEF EXECUTIVE, I AM OF THE CONSIDERED OPINION THAT A SUM OF RS.6,00,000/ - IS COMMENSURATE WITH THE DUTIES OF THE OVERALL MANAGEMEN T AS PERFORMED BY SHRI ANIL JHUNJHUNWALLA. THE AMOUNT OF RS.22,80,000/ - BEING THE AMOUNT BEING PAID TO THESE PERSONS IN EXCESS OF THE AMOUNTS ALLOWED ABOVE, IS DISALLOWED IN THE HANDS OF THE FIRM . AGAINST THE ABOVE ORDER, ASSESSEE PREFERRED APPEAL BEFOR E THE LD. CIT(APPEALS). 6. LD. CIT(APPEALS) DELETED THE ADDITION AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE BY HOLDING AS UNDER: - ON CAREFUL CONSIDERATION OF THE FACTS AND IN LAW, I AM OF THE OPINION THAT THE AO WAS NOT JUSTIFIED IN MAKING THE DIS ALLOWANCE OF SALARY TO THE EXTENT OF RS.22,80,000/ - BY INVOKING PROVISIONS OF SECTION 40A(2)(B) OF THE ACT. IT IS A FACT ON RECORD THAT OUT OF THE THREE PARTNERS OF THE APPELLANT - FIRM, ONE OF THE PARTNER WAS HUF AND OTHER TWO PARTNERS WERE THE LADY MEMBERS OF THE FAMILY AND HENCE THE ENTIRE BUSINESS OF THE APPELLANT FIRM WAS MANAGED AND CONTROLLED BY SHRI K.P. JHUNJHUNWALLA AND SHRI ANIL KUMAR JHUNJHUNWALLA. IT IS ALSO A FACT ON RECORD THAT YEAR AFTER YEAR, THE TURNOVER OF THE APPELLANT FIRM HAS INCREASED S UBSTANTIALLY AND THAT WAS DUE TO THE EFFORTS OF THESE TWO PERSONS. BOTH SHRI K.P. JHUNJHUNWALLA AND SHRI ANIL KUMAR JHUNJHUNWALLA ARE HAVING LOT OF EXPERIENCE AND BACKGROUND IN THE AUTOMOBILE BUSINESS AND AS A RESULT THEY WERE ABLE TO INCREASE THE BUSINESS OF THE APPELLANT FIRM. HENCE, THE PAYMENT OF SALARY MADE TO THEM FOR THEIR SERVICES AND EFFORTS CANNOT BE DISALLOWED BY INVOKING PROVISIONS OF SECTION 40A(2)(B) OF THE ACT. THE HON BLE SUPREME COURT IN THE CASE OF SASOON J. DAVID & CO. PVT. LTD. VS. - CIT , 118 ITR I.T.A. NO . 722 / KOL ./20 11 ASSESSMENT YEAR: 200 7 - 20 0 8 PAGE 5 OF 9 261, 275 HAD LAID DOWN THAT ORDINARILY IT IS FOR THE ASSESSEE TO DECIDE WHETHER ANY EXPENDITURE SHOULD BE INCURRED IN THE COURSE OF ITS OR HIS BUSINESS. SUCH EXPENDITURE MAY BE INCURRED VOLUNTARILY OR WITHOUT ANY NECESSITY AND IF IT IS UNCURED FO R PROMOTING THE BUSINESS, THE ASSESSEE CAN CLAIM DEDUCTION THEREOF EVEN THOUGH THERE WAS NO COMPELLING NECESSITY TO INCUR SUCH EXPENDITURE. HOWEVER, IN THE CASE OF APPELLANT FIRM, IT HAS INCURRED EXPENDITURE ON ACCOUNT OF SALARY TO SHRI K.P. JHUNJHUNWALLA AND SHRI ANIL KUMAR JHUNJHUNWALLA WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ITS BUSINESS AS THE ENTIRE BUSINESS OF THE APPELLANT FIRM WAS CONTROLLED AND MANAGED BY THEM. IN THE CASE OF ALUMINIUM CORPORATION OF INDIA LTD. VS. - CIT REPORTED IN 86 ITR 11, 17 (SC), IT WAS LAID DOWN BY THE HON BLE COURT THAT THE TRUE TEST OF AN EXPENDITURE LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF TRADE OR BUSINESS IS THAT IT IS INCURRED BY THE ASSESSEE AS INCIDENTAL TO ITS TRADE FOR THE PURPOSE OF KEEPING THE TRADE GO ING. THE EXPENDITURE INCURRED MUST BE FOR COMMERCIAL EXPEDIENCY. VARIOUS OTHER JUDICIAL PRONOUNCEMENTS RELIED UPON BY THE APPELLANT ALSO ADVANCES THE CLAIM OF THE APPELLANT. IN VIEW OF THE ABOVE, THE AO IS DIRECTED TO DELETE THE ADDITION OF RS.22,80,000/ - MADE BY HIM BY INVOKING THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT. THE GROUND NOS. 2, 3, 4 AND 5 ARE ALLOWED . 7. AGAINST THE ABOVE ORDER OF LD. CIT(APPEALS), REVENUE IS IN APP E AL BEFORE THE TRIBUNAL. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT IN THIS CASE, THE ASSESSING OFFICER HAS MADE THE DISALLOWANCE OF THE SALARY PAID TO SHRI K.P. JHUNJHUNWALA AND SHRI ANIL KUMAR JHUNJHUNWALA BY INVOKING THE PROVISIONS OF SECTION 40A(2)(B) . ASSESSING OFFICER H AS OPINED THAT THE SALARY PAID TO THEM WAS EXCESSIVE WHEN THE SAME IS COMPARED TO PAYMENTS TO OTHER EMPLOYEES OF THE FIRM. THE ASSESSING OFFICER WAS ALSO OF THE OPINION THAT THE SALARY RECEIVED WAS EXCESSIVE WHEN COMPARED TO THE SALARY RECEIVED BY THESE TWO PERSONS FROM THE COMPANY WHERE THEY ARE DIRECTORS. BY HOLDING SO, ASSESSING OFFICER HAS OPINED THAT SHRI K.P. JHUNJHUNWALA SHOULD HAVE BEEN PAID A SUM OF RS.2,40,000/ - AND SHRI ANIL KUMAR JHUNJHUNWALA SHOULD HAVE BEEN PAID A SUM OF RS.6,00,000/ - . I.T.A. NO . 722 / KOL ./20 11 ASSESSMENT YEAR: 200 7 - 20 0 8 PAGE 6 OF 9 9. N OW WE NOTE THAT IT IS A SETTLED LAW THAT ASSESSING OFFICER CANNOT SIT INTO THE SHOES OF THE ASSESSEE AND DECIDE WHAT IS REASONABLE. HON BLE APEX COURT IN THE CASE OF CIT, BOMBAY VS. WALCHAND & CO. PVT. LIMITED REPORTED IN 65 ITR 381 HAS HELD THAT IN APPL YING THE TEST OF COMMERCIAL EXPEDIENCY FOR DETERMINING WHETHER THE EXPENDITURE WAS WHOLLY AND EXCLUSIVELY LAID OUT FOR BUSINESS , THE EXPENDITURE HAS TO BE ADJU DGED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT OF REVENUE . NOW WE NOTE THAT IN THIS CASE THIS IS NOT THE FIRST YEAR IN WHICH THE SALARY HAS BEEN PAID TO THE AFORESAID PERSONS. SALARY HAS BEEN PAID TO THESE PERSONS AS UNDER IN THE PRECEDING ASSESSMENT YEAR AND NO DISALLOWANCE HAS BEEN MADE: SHRI ANIL JHUNJHUNWALALA SHRI K.P. JHUNJHUNWALALA 2 003 - 04 10,80,000/ - -- 2004 - 05 14.40,000/ - -- 2005 - 06 18,00,000 4,40,000/ - NOW WE NOTE THAT WHEN THE EARLIER YEARS, THE SALARY PAID WHICH WAS MUCH MORE THAN WHAT THE ASSESSING OFFICER HAS OPINED TO BE REASONABLE IN THIS YEAR AND NO DISALLOWA NCE WAS MADE IN EARLIER YEARS. REVENUE CANNOT BE ALLOWED TO CHANGE ITS ST A NCE WITHOUT ANY CHANGE IN THE FACTS AND CIRCUMSTANCES OF THE CASE. WHEN THE REVENUE HAS TAKEN A VIEW THAT THE SALARY AS HIGH AS RS.22,40,000/ - WAS NOT TO BE DISALLOWED IN THE PRECEDI NG YEAR, IT CANNOT NOW HOLD THAT IN THE PRESENT ASSESSMENT YEAR THE SALARY SHOULD ONLY BE RS.8,40,000/ - . HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS. - DALMIA PROMOTERS PVT. LTD. , REPORTED IN 281 ITR 346 , HAS HELD THAT FOR REJECTING THE VIEW TAKE N IN EARLIER YEARS, THERE MUST BE CHANGE IN THE FACT SITUATION OR LAW. IN THIS YEAR, WE DO NOT FIND THAT THE ASSESSING OFFICER HAS BROUGHT ON RECORD ANY CHANGE IN FACT SITUATION OR LAW WARRANTING DISALLOWANCE OF SALARY PAID. I.T.A. NO . 722 / KOL ./20 11 ASSESSMENT YEAR: 200 7 - 20 0 8 PAGE 7 OF 9 10. WE FURTHER NOTE THAT THE ASSESSING OFFICER HAS MADE THE DISALLOWANCE UNDER SECTION 40A(2)(B). SECTION 40A(2)(B) MANDATES FOR DISALLOWANCE OF THE EXCESSIVE PORTION THAT WHEN THE PAYMENT HAS BEEN MADE TO THE PERSONS AS SPECIFIED IN THE SAID SECTION WH ICH IN THE ASSESSING OFFICER S O PINION IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FA IR MARKET VALUE OF THE GOODS, SERVICE OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE. NOW IN THE PRESENT CASE, WE FIND THAT THE AS SESSING OFFICER HAS NOT BROUGHT ON ANY RECORD THAT THE FAIR MARKET VALUE OF THE SERVICES RENDERED BY THESE TWO PERSONS WAS ONLY RS.8,40,000/ - . ASSESSING OFFICER HAS MADE THE COMPARISON WITH OTHER EMPLOYEES IN THE FIRM. NOW THIS CANNOT BE A BENCH - MARK OF TH E COMPARISON AS THE DUTIES AND RESPONSIBILITIES AND THE SERVICES PERFORMED BY THESE PERSONS HAS NOT BEEN SAID TO BE SIMILAR TO THE OTHER PERSONS COMPARED. FURTHER, ASSESSING OFFICER S ESTIMATE THAT SHRI K.P. JHUNJHUNWALA SHOULD BE PAID RS.2,40,000/ - AND SH RI ANIL JHUNJHUNWALA SHOULD BE PAID RS.6,00,000/ - IS NOT BASED UPON ANY COGENT MATERIAL AND WAS BASED UPON THE SURMISE OF THE ASSESSING OFFICER, WHICH IS NOT SUSTAINABLE. WE FURTHER NOTE THAT THE ASSESSEE S COUNSEL HAS MADE THE SUBMISSIONS BEFORE THE LD. C IT(APPEALS) THAT THE ASSESSEE S TURNOVER HAS INCREASED BY HUGE AMOUNT DUE TO THE ADVICE, GUIDANCE AND BUSINESS ACUMEN OF THESE TWO PERSONS AS UNDER: - FINANCIAL YEAR TURNOVER IN RS/LACS 2002 - 03 500 2003 - 04 658 2004 - 05 745 2005 - 06 824 2006 - 07 803 20 07 - 08 861 11. THUS IN THE BACKGROUND OF THE AFORESAID DISCUSSION , WE HOLD THAT THE ASSESSING OFFICER HAS NOT BROUGHT ON RECORD ANY COGENT MATERIAL TO I.T.A. NO . 722 / KOL ./20 11 ASSESSMENT YEAR: 200 7 - 20 0 8 PAGE 8 OF 9 SUBSTANTIATE THAT THE SALARY PAID TO SHRI K.P. JHUNJHUNWALA AND SHRI ANIL JHUNJHUNWALA WAS TO BE DISALLO WED UNDER SECTION 40A(2)(B) AS DISCUSSED ABOVE. T O RECAP T HIS IS PRIMARILY DUE TO THE FACT THAT COMPARATIVE SUBSTANTIAL HIGHER SALARY WAS PAID IN EARLIER YEARS AND NO DISALLOWANCE WAS MADE AND THERE IS NO CHANGE IN THE FACTS AND CIRCUMSTANCES DURING THE CU RRENT YEAR. ASSESSING OFFICER WAS NOT BR OUGHT ABOUT ANY COGENT BASIS FOR HIS ESTIMATE OF WHAT IS EXCESSIVE AND UN REASONABLE. IT IS ONLY THE SURMISE OF THE ASSESSING OFFICER WHICH IS NOT SUSTAINABLE. THE ASSESSEE - FIRM HAS RECORDED SUBSTANTIAL INCREASE IN TU RNOVER WHICH SUPPORTS THE INCREASE IN SALARY OF THESE TWO PERSONS. ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LD. CIT(APPALS) AND ACCORDINGLY WE UPHOLD THE SAME. 12. APROPOS GROUND NO. 2; DISALLOWANCE UNDER SECTION 14A : - O N THIS ISSUE THE AS SESSING OFFICER NOTED THAT THE ASSESSEE MADE INVESTMENT OF RS.6,13,910/ - IN SHARES AND IT I S EARNING DIVIDEND EXEMPT ED FROM TAX. THE ASSESSING OFFICER INVOKED THE PROVISIONS OF SECTION 14A AND COMPUTED THE DISALLOWANCE IN TERMS OF RULE 6D AMOUNTING TO RS.4 2,480/ - . UPON ASSESSEE S APP E AL, LD. CIT(APPEALS) ACCEPTED THE ASSESSEE S SUBMISSION THAT PROVISIONS OF RULE 8D ARE NOT APPLICABLE IN THE YEAR UNDER APPEAL. HE HELD THAT THE DISALLOWANCE UNDER SECTION 14A BY APPLYING THE PROVISIONS OF RULE 8D COULD ONLY BE MADE FROM ASSESSMENT YEAR 2008 - 09 ONWARDS. HOWEVER, HE HELD THAT HE WAS NOT CONVINC ED WITH THE SUBMISSION OF THE ASSESSEE THAT IT HAS NOT INCURRED ANY EXPENDITURE IN RELATION TO EXEMPTED INCOME. HE REFERRED TO THE ITAT, KOLKATA BENCH DECISION IN SEVERAL C ASES THAT 1% OF THE EXEMPTED INCOME SHOULD BE TREATED AS EXPENDITURE INCURRED IN RELATION TO THE EXEMPTED INCOME. IN VIEW OF THE ABOVE, LD. CIT(APPEALS) DIRECTED THE ASSESSING OFFICER TO RESTRICT THE DISALLOWANCE UNDER SECTION 14A AT THE RATE OF 1% OF THE EXEMPTED INCOME. AGAINST THE ABOVE ORDER, R EVENUE IS IN APPEAL BEFORE THE TRIBUNAL. I.T.A. NO . 722 / KOL ./20 11 ASSESSMENT YEAR: 200 7 - 20 0 8 PAGE 9 OF 9 13. WE HAVE HEARD BOTH THE PARTIES AND PERUS ED THE RECORDS. WE FIND THAT THE LD. CIT(APPEALS) IS CORRECT IN HOLDING THAT RULE 8D IS NOT APPLICABLE IN THE IMPUGNED ASSESSME NT YEAR. HENCE, COMPUTATION OF DISALLOWANCE BY APPLYING RULE 8D IS NOT SUSTAINABLE. HOWEVER, IT ALSO HAS BEEN ACCEPTE D BY THIS TRIBUNAL IN THE CASE OF REO AGRO LTD. VS. - ITO REPORTED IN [2013] 144 ITD 141 THAT 1% DISALLOWANCE OF EXEMPTED INCOME MEETS THE ENDS OF JUSTICE BEFORE APPLICATION OF RULE 8D. IN THIS VIEW OF THE MATTER, WE UPHOLD THE ORDER OF THE LD. CIT(APPEALS). 14. IN THE RESULT, THE APPEAL FILED BY THE REVENUE STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH JANUARY , 201 5 . SD/ - SD/ - MAHAVIR SINGH SHAMIM YAHYA (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) KOLKATA, THE 28 TH D AY OF JANUARY , 201 5 COPIES TO : (1) ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE - 32 , KOLKATA, 10B, M IDDLETON ROW, 2 ND FLOOR, KOLKATA - 700 0 71 (2) M/S. MATADOR SERVICES, 25B, PARK STREET, KOLKATA - 700 016 ( 3) COMMISSIONER OF INCOME - TAX (APPEALS) (4) COMMISSIONER OF INCOME TAX ( 5 ) THE DEPARTMENTAL REPRESENTATIVE ( 6 ) GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL KOLKATA B ENCHES, KOLKATA LAHA/SR. P.S .