SYNERGY ART FOUNDATIN LTD, MUMBAI V. ACIT 8(2)(2), MUMBAI

ITA 767/MUM/2017

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 3313 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-02-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 03-02-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: CHAUDHARY ARUN KUMAR SINGH
• Assessee Lawyers: J PRABHAKAR
• Keywords: Assessment record; Commercial expediency
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH G MUMBAI BEFORE SHRI PAWAN SINGH (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 767/MUM/2017 ASSESSMENT YEAR: 2011 - 12 SYNERGY ART FOUNDATION LTD. 6/19, II FLOOR, GRANTS BUILDING ARTHUR BUNDER ROAD, COLABA, MUMBAI - 400005. VS. ACIT - (8)(2)(2) ROOM NO. 615, AAYAKAR BHAVAN, MAHARISHI KARVE ROAD, MUMBAI - 400020. PAN NO. AABCS7467F APPELLANT RESPONDENT ASSESSEE BY : MR. J. PRABHAKAR , AR REVENUE BY : MR. CHAUDHARY ARUN KUMAR SINGH, DR DATE OF HEARING : 29 /11/2018 DATE OF PRONOUNCEMENT: 18/02/2019 ORDER PER N.K. PRADHAN, AM THIS IS AN APPEAL FILED BY THE ASSESSEE. THE RELEVANT ASSESSMENT YEAR IS 2011 - 1 2 . THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMIS SIONER OF INCOME TAX (APPEALS) - 14 , MUMBAI [IN SHORT CIT(A)] AND ARISES OUT OF THE ASSESSMENT COMPLETED U/S 143(3) OF THE INCOME TAX ACT 1961, (THE ACT). 2. THE GROUNDS OF APPEAL FILED BY THE ASSESSEE R EAD AS UNDER: 1. THE LD. CIT(A) IS NOT JUSTIFIED IN CONFIRMING THE DISALLOWANCE OF RS.28,36,642/ - AS ALLEGED EXCESS REMUNERATION WITHOUT PROPER BASIS. SYNERGY ART ITA NO. 767/MUM/2017 2 2. THE LD. CIT(A) HAS NOT ADDUCED ANY REASON OR EVIDENCE AS TO SPECIFIC PROVISION UNDER THE ACT, SUCH AS 40A(2) (B) TO JUSTIFY THE DISALLOWANCE OF REMUNERATION PAID TO DIRECTORS. 3. THE LD. CIT(A) IS NOT JUSTIFIED IN IGNORING VALID REBUTTAL GIVEN IN THE WRITTEN SUBMISSIONS FILED BEFORE HIM AT THE APPELLATE PROCEEDINGS. 4. IN ANY EVENT, THE ORDER OF THE CIT(A) IS ILLEGAL , CAPRICIOUS AND RENDERED WITHOUT DUE REGARD TO THE FACTS AND CIRCUMSTANCES OF THE APPELLANTS CASE AND THE LAW APPLICABLE THERETO. 5. FOR THESE GROUNDS AND FOR SUCH OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING IT IS PRAYED THAT THE OTHER OF THE CIT(A) BE MODIFIED ACCORDINGLY . 3. BRIEFLY STATED, THE FACTS ARE THAT THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR (AY) 2011 - 12 ON 29.09.2011 DECLARING LOSS AT RS.73,88,458/ - . THE NATURE OF BUSINESS OF THE ASSESSEE IS SELLING ART WORKS AND PAINTINGS. IN THE PROFIT AND LOSS ACCOUNT, THE ASSESSEE HAD DEBITED A SUM OF RS.72,00,000/ - PERTAINING TO DIRECTORS REMUNERATION VIZ. SHRI SANJAY KUMAR OF RS.24,00,000/ - AND MS. GEETA MEHRA OF RS.48,00,000/ - . DURING THE COURSE OF ASSESSMENT PROCEEDINGS , THE ASSESSING OFFICER (AO) NOTICED THAT IN THE AUDITORS REPORT AT POINT 4(G) ANNEXED TO THE BALANCE SHEET, THE AUDITOR HAS MENTIONED THAT SUBJECT TO NOTE 3 REGARDING REMUNERATION TO MANAGING/WHOLE TIME DIRECTORS, IN EXCESS OF THE LIMITS SPECI FIED U/S 198 R.W.S. 309 OF THE COMPANIES ACT, 1956, FOR WHICH APPROVAL OF THE CENTRAL GOVERNMENT IS PENDING TO BE FILED AND NON - COMPLIANCE OF TRANSACTIONS ENTERED U/S 297 OF THE COMPANIES ACT, 1956 FOR WHICH PRIOR APPROVAL OF THE CENTRAL GOVERNMENT IS NOT OBTAINED READ TOGETHER WITH THE SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS AS PER SCHEDULE 19. SYNERGY ART ITA NO. 767/MUM/2017 3 IN VIEW OF THE ABOVE, THE AO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY MANAGERIAL REMUNERATION IN EXCESS OF LIMITS PRESCRIBED SHOULD NOT BE DISALLOWED AND ADDED TO THE TOTAL INCOME, AS THE APPROVAL OF CENTRAL GOVERNMENT IS PENDING. IN RESPONSE TO IT, THE ASSESSEE SUBMITTED CERTIFICATE FROM MINISTRY OF CORPORATE AFFAIRS, WHEREIN IT IS SHOWN THAT IN RESPECT OF SHRI SANJAY KUMAR, EXCESS REMUNERATION OF RS. 22,73,334/ - OUT OF TOTAL REMUNERATION OF RS.24,00,000/ - NEEDS TO BE RECOVERED AND IN RESPECT OF MS. GEETA MEHRA, REMUNERATION OF RS.41,86,872/ - WAS APPROVED. THEREFORE, THE AO CAME TO A FINDING THAT MS. GEETA MEHRA GOT EXCESS REMUNERATION OF RS.6,13,128/ - NOT APPROVED BY THE CENTRAL GOVERNMENT. ACCORDINGLY, THE AO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE SUM OF RS.28,86,462/ - (RS.22,73,334/ - + RS.6,13,128/ - ), WHICH IS IN EXCESS OF REMUNERATION PAID TO THE DIRECTORS SHOULD NOT BE DISALLOWED. THE AO NOTED THAT THE ASSESSEE FAILED TO FURNISH ANY PLAUSIBLE EXPLANATION ON THE ABOVE. AS THE REMUNERATION WAS IN EXCESS OF THE LIMITS SET BY THE COMPANIES ACT AND THAT THE CENTRAL GOVERNMENT REJECTED THE APPLICATION FOR REMUNERATION, THE AO DISALLOWED THE EXCESS REM UNERATION OF RS.28,86,642/ - AND ADDED IT TO THE TOTAL INCOME. 4. IN APPEAL, THE LD. CIT(A) OBSERVED THAT CLEARLY IT IS A CASE WHERE EXCESS AMOUNT IS PAID IN CONTRAVENTION TO THE COMPANIES ACT AND DULY MENTIONED BY THE AUDITORS IN THEIR REPORT ANNEXED TO THE BALANCE SHEET. THIS AMOUNT IS TO BE RECOVERED AND IT IS ALSO SU BMITTED BY THE ASSESSEE THAT THE EXCESS AMOUNT IS OTHERWISE ADJUSTED IN SUBSEQUENT YEARS. ON THE ABOVE REASONS, THE LD. CIT(A) CONFIRMED THE DISALLOWANCE OF RS.28,86,642/ - MADE BY THE AO. SYNERGY ART ITA NO. 767/MUM/2017 4 5. BEFORE US, THE LD. COUNSEL OF THE ASSESSEE FILES A PAPER BOOK (P /B) CONTAINING (I) ISSUE FOR CONSIDERATION, (II) EXTRACT OF EGM DATED 07/04/2011 AND EXPLANATORY STATEMENT THERETO, (III) COPY OF MCA ORDER DATED 03/01/2012 FOR MS. GEETHA MEHRA FOR REGULARISATION OF REMUNERATION PAYMENTS, (IV) COPY OF MCA ORDER DATED 25/0 4/2012 FOR MR. V. SANJAY KUMAR FOR REGULARIZATION FOR REMUNERATION PAYMENTS, (V) COPY OF WRITTEN SUBMISSION DATED 29/09/2015 FILED BEFORE CIT - (A) - 14 MUMBAI, (VI) COPY OF WRITTEN SUBMISSION DATED 07/11/2016 FILED BEFORE CIT - (A) - 14 MUMBAI (VII) COPY OF STATEMENT FILED BEFORE CIT - (A) - 14 SHOWING RECOVERY OF EXCESS REMUNERATION FROM MR. V. SANJAY KUMAR, (VIII) COPY OF AUDIT REPORT DATED 05/09/2011 UNDER CLAUSE (G) - 2 PAGES, (IX) COPY OF RELEVANT NOTE 3 OF NOTES TO ACCOUNTS, (X) COPY OF CIT - A ORDER DATED 24/0 2/2017 IN ITA NO. 124/2015 - 2016 FOR ASSESSMENT YEAR 2012 - 2013 AND (XI) COPY OF CIRCULAR NO. 6 P DATED 06/07/1968. THE LD. COUNSEL FURTHER SUBMITS THAT A PERUSAL OF THE ASSESSMENT RECORDS AND CORRESPONDENCES WOULD REVEAL THAT NO EXPLANATION WAS SOUGHT FOR IN WRITING FOR TREATING THE ALLEGED EXCESS AS NOT ALLOWABLE EXPENSES UNDER THE ACT. THE REMUNERATION PAID OR PAYABLE AS THE CASE MAY BE, IS JUSTIFIED ON COMMERCIAL EXPEDIENCY AND BASED ON VALID RESOLUTION APPROVED BY THE SHAREHOLDERS OF THE COMPANY IT ITS EGM HELD ON 07.04.2011 APPROVING THE PAYMENT OF RS.4.90 LAKHS PER MONTH TO EACH OF THE DIRECTORS MS. GEETHA MEHRA AND V. SANJAY KUMAR. IT IS STATED THAT AFTER THE CLOSURE OF BOOKS AND AUDIT OF ACCOUNTS FOR THE YEAR ENDED 31.03.2011 (AY 2011 - 12), BEING THE IMPUGNED YEAR, THE AUDITORS NOTICED THAT THE REMUNERATION SANCTIONED BY THE EGM AND PAID TO DIRECTORS WAS SYNERGY ART ITA NO. 767/MUM/2017 5 IN EXCESS OF THE LIMITS SET OUT IN SCHEDULE XIII OF THE COMPANIES ACT, WHICH EXCESS CAN BE CURED BY AN APPROPRIATE APPLICATION TO THE CENTRAL GOVERNME NT U/S 309 OF THE COMPANIES ACT. ACCORDINGLY, THE STATUTORY AUDITORS IN THEIR AUDIT REPORT VIDE PARA (G) MADE COMMENTS WITHOUT QUANTIFYING IN ANY MANNER THE ALLEGED EXCESS. IT IS STATED THAT THE MANAGERIAL REMUNERATION PAID DURING THE YEAR AND IN EARLIER Y EARS IS IN EXCESS TO THE LIMITS PRESCRIBED U/S 198. THE COMPANYS APPLICATION TO THE CENTRAL GOVERNMENT FOR APPROVAL OF EXCESS REMUNERATION PAID IS PENDING. THE LD. COUNSEL ALSO SUBMITS THAT AN IMAGINARY EXCESS HAS BEEN UNILATERALLY DERIVED BY THE AO WIT HOUT ANY SHOW CAUSE NOTICE IN THIS REGARD TO THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS. IT IS STATED THAT T HE MANNER OF CONCLUDING THE PAYMENT MADE AS ALLEGED EXCESS WITHOUT ESTABLISHING ANY VIOLATION OF THE COMPANIES ACT OR THE INCOME TAX ACT BY BOTH THE AO AND CIT(A) DOES NOT STAND THE TEST OF LAW. PERUSAL OF THE AUDITORS QUALIFICATION IN POINT NO. (G) OF THE REPORT DOES NOT REFER TO ANY CONCRETE FIGURE BUT MERELY REFERS TO NOTE 3 TO ALLEGE EXCESS BEYOND THE LIMIT SPECIFIED U/S 198 AND 309 OF THE CO MPANIES ACT. AGAIN NOTES TO ACCOUNT IN NOTE 3 REFERRED TO IN THE AUDITORS REPORT DOES NOT REFER TO ANY EXCESS AS ALLEGED IN THE SUM OF RS.28,86,462/ - , BUT IT MERELY SHOWS A TABULATION WORKING OUT MANAGERIAL REMUNERATION U/S 198 OF THE COMPANIES ACT, AGGRE GATING TO RS.80.25 LAKHS FOR THIS ASSESSMENT YEAR. THUS FACTUALLY THERE IS NO MENTION IN EITHER THE ALLEGED AUDIT REPORT OR THE ALLEGED NOTES TO ACCOUNTS INDICATING ANYWHERE THAT A SUM INVOLVED IS AT RS.28,86,462/ - . SYNERGY ART ITA NO. 767/MUM/2017 6 THE LD. COUNSEL SUBMITS THAT THE AO HA S USED HIS DEDUCTIVE LOGIC TO WORK OUT THE ALLEGED SUM OF RS.28,86,462/ - , DE HORS THE AUDIT REPORT AND THE NOTES TO ACCOUNTS BY TAKING INTO ACCOUNT EXTRANEOUS MATERIAL NOT FORMING PART OF THE AUDIT REPORT AND THE ALLEGED NOTED TO ACCOUNTS. THE LD. COUNSE L FURTHER SUBMITS THAT THE CIT(A) HAS NOT TAKEN COGNIZANCE OF WRITTEN SUBMISSIONS DATED 29.09.2015 FILED ON 15.10.2015 GIVING THE ENTIRE PICTURE ON THE DISALLOWANCE MADE, ENCLOSING THEREIN COPIES OF THE EXECUTIVE ORDERS SANCTIONING REMUNERATION BY THE GOVE RNMENT OF INDIA AS WELL AS COPIES OF RESOLUTIONS PASSED BY THE EGM OF THE ASSESSEE - COMPANY GRANTING APPROVAL BY THE SHAREHOLDERS FOR PAYMENT OF ENHANCED REMUNERATION OF RS.4,90,000/ - P.M FOR BOTH THE DIRECTORS EFFECTIVE FROM 01.04.2011, WHICH WORKS OUT TO RS.1,17,60,000/ - , BEING FAR MORE THAN THE ACTUAL PAYMENT OF RS.72,00,000/ - IN THE AGGREGATE, AS ALSO SHOWING THE MANNER OF RECOVERY OF EXCESS REMUNERATION IN THE SUBSEQUENT 3 YEARS, IN ACCORDANCE WITH THE DIRECTIONS OF THE MINISTRY AGGREGATING IN ALL TO RS .62,44,020/ - . IN OTHER WORDS, THE ENTIRE EXCESS WHICH IS PAID BY A VALID RESOLUTION SANCTIONING HIGHER REMUNERATION WAS REPAID BACK TO THE COMPANY, BY PRO - TANTO REDUCED REMUNERATION FOR THE SUBSEQUENT 3 YEARS WHICH PROVES THAT IN EFFECT, THE PAYMENTS MADE EARLIER AND RECOVERY LATER ON ARE WITHIN THE FOUR CORNERS OF LAW AND THAT THERE IS NO INFRACTION OF PROVISIONS OF EITHER THE COMPANIES ACT OR THE INCOME TAX ACT IN THIS CASE. IT IS STATED BY THE LD. COUNSEL THAT THE SUM OF RS.72,00,000/ - PER ANNUM TOWARD S MANAGERIAL REMUNERATION WAS BASED ON COMMERCIAL SYNERGY ART ITA NO. 767/MUM/2017 7 EXPEDIENCY AND SANCTION FROM THE SHAREHOLDERS WAS FOR A HIGHER AMOUNT OF RS.1,17,60,000/ - AND NO PART THEREOF CAN BE ATTRIBUTED TO BE ILLEGAL SINCE IT HAS THE APPROVAL BY A MANDATE FROM THE SHAREHOLDERS UND ER THE COMPANIES ACT. THE RECOVERY HAD TO BE ATTEMPTED BY VIRTUE OF THE SUPERVENING IMPOSSIBILITY OF INADEQUATE PROFITS BEING RECKONED AT THE END OF THE ACCOUNTING YEAR AFTER 31.03.2011, WHICH WAS BASED ON THE AUDITED ACCOUNTS AND HENCE POST - FACTO SANCTION OF THE EXCESS REMUNERATION WAS MADE BY PROPER APPLICATION TO THE CENTRAL GOVERNMENT U/S 309(5B) OF THE COMPANIES ACT. THUS THE LD. COUNSEL SUBMITS THAT THE DISALLOWANCE MADE IS NEITHER IN CONTRAVENTION OF SECTION 40A(2)(B) R.W. CBDT CIRCULAR DATED 06.07 .1968 NOR IN TERMS OF SECTION 37(1), SINCE BUSINESS EXPEDIENCY MANDATES PAYMENT OF REASONABLE REMUNERATION TO DIRECTORS, COMMENSURATE WITH THEIR AGE AND EXPERIENCE IN THE RELEVANT FIELD OF BUSINESS. 6. ON THE OTHER HAND, THE LD. DR SUBMITS THAT IT IS A CASE WHERE EXCESS AMOUNT IS PAID IN CONTRAVENTION THE COMPANIES ACT AND DULY MENTIONED BY THE AUDITORS AS PER THEIR REPORT ANNEXED TO THE BALANCE SHEET. THUS THE LD. DR SUPPORTS THE ORDER PASSED BY THE LD. CIT(A). 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. IN THE INSTANT CASE, AFTER THE CLOSURE OF THE BOOKS AND AUDIT OF ACCOUNTS FOR THE YEAR ENDED 31.03.2011 (AY 2011 - 12), BEING THE IMPUGNED YEAR, THE AUDITORS NOTIC ED THAT THE REMUNERATION SANCTIONED BY THE EGM AND PAID TO THE DIRECTORS WAS IN EXCESS OF THE SYNERGY ART ITA NO. 767/MUM/2017 8 LIMITS SET OUT IN SCHEDULE - XIII OF THE COMPANIES ACT. THE EXCESS CAN BE REDONE BY AN APPROPRIATE APPLICATION TO THE CENTRAL GOVERNMENT U/S 309 OF THE COMPANIES AC T. ACCORDINGLY, THE STATUTORY AUDITORS IN THEIR AUDIT REPORT VIDE PARA (G) MADE COMMENTS WITHOUT QUANTIFYING IN ANY MANNER THE ALLEGED EXCESS WHICH IS REPRODUCED BELOW: IN OUR OPINION TO THE BEST OF OUR INFORMATION AND ACCORDING TO THE EXPLANATIONS GIVEN TO US, THE SAID ACCOUNTS TO NOTE 3 REGARDING REMUNERATION TO MANAGING/WHOLETIME DIRECTORS IN EXCESS OF THE LIMITS SPECIFIED UNDER SECTION 198 R.W.S. 309 OF THE COMPANIES ACT, 1956, FOR WHICH APPROVAL OF CENTRAL GOVERNMENT IS PENDING TO BE FILED AND NOT CO MPLIANCE OF TRANSACTIONS ENTERED UNDER SECTION 297 OF THE COMPANIES ACT, 1956, FOR WHICH PRIOR APPROVAL OF CENTRAL GOVERNMENT IS NOT OBTAINED READ TOGETHER WITH THE SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS AS PER SCHEDULE 19GIVE THE INFORM ATION REQUIRED BY THE ACT IN THE MANNER SO REQUIRED BY THE ACT IN THE MANNER SO REQUIRED AND GIVE A TRUE FAIR VIEW IN CONFORMITY WITH THE ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN INDIA. FURTHER, WE FIND THAT THE ENTIRE EXCESS WHICH IS PAID BY A VALID RESOLUTION, SANCTIONING HIGHER REMUNERATION WAS REPAID BACK TO THE COMPANY BY A PRO - TANTO REDUCED REMUNERATION FOR THE SUBSEQUENT 3 YEARS. IT SHOWS THAT THE PAYMENTS MADE EARLIER AND RECOVERY LATER ARE WITHIN THE FOUR CORNERS OF LAW. THERE IS NO INFRACTION OF PROVISIONS OF INCOME TAX ACT. SYNERGY ART ITA NO. 767/MUM/2017 9 IN VIEW OF THE ABOVE REASONS, WE DELETE THE ADDITION OF RS.28,86,642/ - MADE BY THE AO. 8. IN THE RESULT, THE APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 18/02/2019. SD/ - SD/ - (PAWAN SINGH) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED: 18/02/2019 RAHUL SHARMA, SR. P.S. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (SR. PRIVATE SECRETARY) ITAT, MUMBAI