FASHLINK INTERNATIONAL P. LTD, MUMBAI V. ITO WD 9(1)-4, MUMBAI

ITA 7940/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9493 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-11-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 22-11-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 18-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: OMPRAKASH MEERA
• Assessee Lawyers: A B ADVANI
• Keywords: Business expenditure; Fair market value; Wrong claim
• Section: 142(1); 37(1)

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUMBAI . . !'#$ , % &' BEFORE SHRI H.L. KARWA, PRESIDENT AND SHRI N.K. BILLAIYA, AM ./I.T.A. NO. 7940/MUM/2010 ( ( ( ( ( / ASSESSMENT YEAR : 2006-07 M/S. FASHLINK INTERNATIONAL PVT. LTD., 301, SHALAKA, PLOT NO. 32, JUHU ROAD, SANTACRUZ (W), MUMBAI-400 054 / VS. THE ITO 9(1)-4, AAYAKAR BHAVAN, MUMBAI-400 020 ') % ./ *+ ./PAN/GIR NO. : AAACF 1227D ( ), /APPELLANT ) .. ( -.), / RESPONDENT ) ), / / APPELLANT BY: SHRI A.B. ADVANI -.), 0 / / RESPONDENT BY : SHRI OMPRAKASH MEERA 0 12% / DATE OF HEARING : 22.11.2012 34( 0 12% / DATE OF PRONOUNCEMENT : 27.11.2012 &5 / O R D E R PER N.K. BILLAIYA, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A)-19, MUMBAI DT.3.9.2010 PERTAINING TO A.Y. 20 06-07. 2. THE ASSESSEE HAS RAISED TWO SUBSTANTIVE GROUNDS. GROUND NO. 1 RELATES TO DISALLOWANCE OF REMUNERATION PAID TO THE MANAGING DIRECTOR AMOUNTING TO RS. 3,40,000/- AND GROUND NO. 2 RELATE S TO DISALLOWANCE OF RENT PAID TO THE MANAGING DIRECTOR OF THE COMPANY A MOUNTING TO RS. 60,000/-. ITA NO. 7940/MUM/2010 2 3. THE ASSESSEE FILED RETURN OF INCOME ON 18.10.200 6 DECLARING TOTAL INCOME AT RS. 11,74,815/-. THE SAID RETURN WAS SEL ECTED FOR SCRUTINY ASSESSMENT AND NOTICE U/S. 143(2) ALONGWITH NOTIC E U/S. 142(1) WERE ISSUED AND SERVED UPON THE ASSESSEE. THE ASSESSEE COMPANY IS A PARTNER IN M/S. KARNANI BUILDERS & DEVELOPERS HAVING 20% OF SHARE OF PROFIT. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HA S SHOWN FOLLOWING INCOME: A) 20% SHARE OF PROFIT IN PARTNERSHIP FIRM CLAIMED EXEMPT U/S. 10(2A) - RS. 9,62 ,555/- B) INTEREST ON BANK DEPOSITS - RS. 2,313/ - C) INTEREST ON CAPITAL IN PARTNERSHIP FIRM - RS. 18 ,79,084/- D) INTEREST ON LOANS - RS. 6,91,330/- E) INTEREST ON INCOME TAX REFUND = RS. 2,221 /- THE ASSESSEE ALSO CLAIMED CERTAIN EXPENSES , INTER ALIA , DIRECTORS REMUNERATION OF RS. 3,40,000/- AND RENT FOR OFFICE PREMISES AT RS. 60,000/-. 4. THE AO RAISED QUERY SEEKING JUSTIFICATION AND TH E NEXUS OF EXPENSES CLAIMED VIS--VIS INCOME OF THE ASSESSEE. 5. THE ASSESSEE FILED A DETAILED REPLY DT. 14.11.20 08. THE AO DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE FOR THE FOLLO WING REASONS: 1. IT IS SEEN THAT ASSESSEE COMPANY HAS PAID SALARY TO DIRECTOR OF RS. 3,40,000/- DURING THE YEAR IN CONNE CTION WITH EARNING THE INTEREST INCOME OF RS.18,79,084/- FROM PARTNERSHIP FIRM M/S. KARNANI BUILDERS & DEVELOPERS WHEREIN TH E ASSESSEES IS A PARTNER AND HOLDING 20% SHARE. ASSESSEE HAD EA RNED THE SHARE OF PROFIT FROM THE ABOVE FIRM AT RS.9,62,555 /- WHICH WAS CLAIMED AS EXEMPT U/S 10(2A) OF THE I.T. ACT. ITA NO. 7940/MUM/2010 3 2. THE INTEREST INCOME FROM PARTNERSHIP FIRM AND SH ARE OF PROFIT IS EARNED AS PER THE TERMS OF PARTNERSHIP DE ED. THE INCOME EARNED BY THE ASSESSEE COMPANY IS AUTOMATIC. THERE WAS NO NEXUS OF PERFORMING DUTIES BY THE DIRECTOR TO EARN THE INTEREST INCOME AS WELL AS SHARE OF PROFIT, WAS FURNISHED. 3.FURTHER IT IS TO BRING ON RECORD THAT HE ASSESSE E COMPANY HAS EARNED INTEREST INCOME FROM PARTNERSHIP FIRM IN THE PREVIOUS YEAR RELEVANT TO A.YRS. 2004-05 & 2005-06, HOWEVER, NO REMUNERATION / SALARY TO DIRECTOR WAS PAID IN THE C ORRESPONDING PREVIOUS YEAR. NO COMPARATIVE JUSTIFICATION WAS FUR NISHED BY THE ASSESSEE COMPANY AS TO UNDER WHICH CIRCUMSTANCES, I T WAS COMPELLED TO PAY THE REMUNERATION IN THE CURRENT AS SESSMENT YEAR. IT WAS NOT THE CASE THAT IF THE REMUNERATION IS NOT PAID TO THE DIRECTOR, THE EARNING OF INTEREST INCOME BECOME S DOUBTFUL IN THE HANDS OF THE ASSESSEE COMPANY. IN VIEW OF THE A BOVE, THE CONTENTIONS / CLAIMS MADE IN THIS RESPECT BY THE AS SESSEE COMPANY ARE REJECTED AND TREATED AS AN TAX EVADING TECHNIQUES IN THE GARB OF PAYMENT U/S.40A(2)(B) OF THE I.T.ACT . 4. THE ONLY WAY DIRECTOR CAN TAKE THE MONEY FROM TH E COMPANY IS ONLY IN THE FORM OF DIVIDEND WHICH IS PO SSIBLE WHEN THE ASSESSEE COMPANY DECLARES THE DIVIDEND AND PAY THE TAX ON DISTRIBUTED PROFITS OF DOMESTIC COMPANIES U/S 115-0 OF THE I.T.ACT, 1961 @ 15% PLUS SURCHARGE WHICH IS DONE IN THE EARLIER A.YRS. 2004-05 & 2005-06, WHEREIN THE ASSESSEE COMP ANY HAS PAID THE TAX ON DISTRIBUTION PROFITS AND PAID TO TH E SHAREHOLDERS IN THE FORM OF DIVIDEND AND NOT IN THE FORM OF SALARY/REMUNERATION. 5.FURTHER VIDE NOTICE U/S 142(1), THE ASSESSEE WAS ASKED TO FURNISH THE COPY OF RENTAL AGREEMENT FOR RENT PA ID OF RS. 60,000/- TO MR. ANUP SHYAM KARNANI, DIRECTOR OF THE ASSESSEE COMPANY. HOWEVER, NO AGREEMENT IS PROVIDED. THE SAI D AMOUNT OF RS.60,000/- IS SHOWN AS OUTSTANDING. ON VERIFICA TION OF THE EARLIER RECORD, IT WAS REVEALED THAT NO SUCH RENT W AS PAID IN ANY PREVIOUS YEAR EVEN THOUGH THE NATURE OF INCOME / BU SINESS WAS SIMILAR TO THAT OF CURRENT YEAR. THIS CLEARLY INDIC ATES THAT THE PROVISION FOR RENT IS NOT WHOLLY & EXCLUSIVELY FOR THE BUSINESS PURPOSE BUT FOR REDUCING THE TAX LIABILITY. FURTHER MORE, THE ASSESSEE HAS FAILED TO FURNISH THE SUPPORTING EVIDE NCE OF RENT PAYMENT, JUSTIFICATION FOR ALLOWABILITY OF RENT AS BUSINESS EXPENSES. 6.THE CONTENTION OF THE ASSESSEE THAT DUE TO THE EF FORTS OF THE DIRECTORS, THERE WAS INCREASE IN INTEREST INCOM E FROM RS.19,76,749/- TO RS.25,74,938/-, IS NOT ACCEPTABLE . THE INCREASE IN INTEREST WAS DUE TO INVESTMENT MADE IN PARTNERSH IP FIRM AND ITA NO. 7940/MUM/2010 4 AS PER THE CLAUSES OF THE PARTNERSHIP DEED, THE COM PANY IS BOUND TO RECEIVE INTEREST EVEN WITHOUT THE EFFORTS OF THE DIRECTORS. CONSIDERING THE ABOVE FACTS, THE REMUNERATION PAID TO THE DIRECTOR OF RS. 3,40,000/- AND RENT PAID TO MR. ANU P SHYAM KRNANI, DIRECTOR OF THE ASSESSEE COMPANY OF RS. 60 ,000/- TOTALING TO RS.4,00,000/-- IS NOT ALLOWED U/S 37(1) OF THE I.T.ACT, 1961 AS THE ABOVE EXPENDITURE IS NOT WHOLLY AND EXC LUSIVELY FOR THE BUSINESS PURPOSE. PENALTY PROCEEDINGS U/S.271(1 )(C) ARE INITIATED SEPARATELY FOR MAKING WRONG CLAIM OF EXPE NSES WHICH ARE NOT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS ON ACCOUNT OF 40A(2)(B) PAYMENTS. 6. AGGRIEVED BY THE FINDING OF THE AO, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A) BUT WITHOUT ANY SUCCES S. THE LD. CIT(A) WAS OF THE OPINION THAT THERE IS NO NEXUS BETWEEN T HE PERFORMANCE OF THE DUTIES BY THE DIRECTOR AND THE EARNING OF THE COM PANY. THE LD. CIT(A) FURTHER OBSERVED THAT THE ASSESSEE COMPANY HAS NOT BEEN ABLE TO POINT OUT ANY EXCEPTIONAL CIRCUMSTANCES LEADING TO THE PAYMEN T OF SALARY TO THE DIRECTOR AND ACCORDINGLY CONFIRMED THE DISALLOWANCE OF SALARY PAID TO DIRECTOR AT RS. 3,40,000/-. 6. ON PAYMENT OF RENT OF RS. 60,000/-, THE LD. CIT( A) OBSERVED THAT THE ASSESSEE HAS NOT FURNISHED ANY RENT AGREEMENT N OR SUCH RENT PAYMENT WAS CLAIMED IN EARLIER YEARS. AS THE ASSESSEE HAD F AILED TO SUBSTANTIATE ITS CLAIM, THE LD. CIT(A) CONFIRMED THE DISALLOWANCE OF RENT OF RS. 60,000/-. 7. AGGRIEVED BY THE FINDING OF THE LD. CIT(A), ASSE SSEE IS BEFORE US. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AO HAS NOT GIVEN ANY BASIS FOR DISALLOWANCE OF SALARY PAID TO THE DIRECT OR NOR ANY COGENT MATERIALS HAVE BEEN BROUGHT ON RECORDS TO SHOW T HAT REMUNERATION PAID TO DIRECTOR IS EXCESSIVE AND NOT COMPARABLE WITH TH E MARKET RATE. THUS, THE AO HAS GROSSLY ERRED IN INVOKING PROVISIONS OF SEC. 40A(2)(B). SIMILAR IS THE POSITION FOR THE DISALLOWANCE OF REN T OF RS. 60,000/-. ITA NO. 7940/MUM/2010 5 8. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY RELIED ON THE FINDINGS OF THE LOWER AUTHORITIES. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE ORDERS OF THE LOWER AUTHORITIES. UNDOUBTEDLY, THE REMUNERA TION PAID TO THE DIRECTOR HAS BEEN DISALLOWED BY INVOKING PROVISIONS OF SEC. 40A(2)(B). A PERUSAL OF THE SAID SECTION SUGGESTS THAT IF THE AO IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVIN G REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES F OR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PRO FESSION OF THE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO HIM THERE FROM, SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESS IVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. 10. IN THE INSTANT CASE, THE AO HAS NOT BROUGHT ANY COMPARABLE CASE ON RECORD. THE DISALLOWANCE HAS BEEN MADE FOR THE SIM PLE REASON THAT THE DIRECTOR OF THE COMPANY HAS NOT GIVEN ANY SERVICES FOR EARNING OF THE COMPANY. WE FIND THAT THE ASSESSEE-COMPANY IS A PA RTNER IN A FIRM M/S. KARNANI BUILDERS & DEVELOPERS. THE ASSESSEE COMPAN Y BEING A LEGAL PERSON CANNOT ATTEND THE DAY TO DAY AFFAIR OF THE P ARTNERSHIP FIRM THEREFORE IT REQUIRES A NATURAL PERSON TO PERFORM S UCH DUTIES FOR WHICH IT ASSIGNED THE WORK TO THE DIRECTOR OF THE COMPANY. AS THE DIRECTOR WAS LOOKING AFTER THE INTEREST OF THE COMPANY, THE COMP ANY DECIDED TO SUITABLY REMUNERATE THE DIRECTOR FOR WHICH IT PAID A REMUNERATION OF RS. 3,40,000/-. WE ALSO FIND THAT THE SAID DIRECTOR HA S RETURNED A NET TAXABLE INCOME OF RS. 27,16,354/- AS PER THE COMPUTATION OF INCOME OF THE DIRECTOR EXHIBITED AT PAGE-12 OF THE PAPER BOOK WHI CH MEANS THAT THE DIRECTOR IS ALSO TAXED AT THE MAXIMUM RATE OF TAX I .E. 30% WHICH RATE IS ITA NO. 7940/MUM/2010 6 ALSO APPLICABLE TO A CORPORATE ASSESSEE I.E. THE AP PELLANT IN OUR CASE. THE ALLEGATION OF THE AO THAT THIS ARRANGEMENT IS ONLY TO EVADE TAX DOES NOT HOLD GOOD BECAUSE BOTH THE PARTIES ARE SUBJECT TO T AX AT THE SAME RATE. 11. CONSIDERING ALL THESE FACTS IN TOTALITY, WE DO NOT FIND ANY REASON TO DISALLOW THE CLAIM OF REMUNERATION OF RS. 3,40,000/ -. FINDING OF THE LD. CIT(A) ARE REVERSED. THE AO IS DIRECTED TO ALLOW TH E CLAIM OF REMUNERATION OF RS. 3,40,000/-. GROUND NO. 1 IS ALLOWED. 12. GROUND NO. 2 RELATES TO DISALLOWANCE OF RENT O F RS. 60,000/- PAID TO THE SAME DIRECTOR I.E. SHRIANUP SHYAM KARNANI. THE LD. CIT(A) CONFIRMED THE ADDITION ON THE GROUND THAT NO RENT A GREEMENT WAS FURNISHED AND NO SUCH RENT PAYMENT WAS CLAIMED IN E ARLIER YEARS. THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO PAGE -1A OF THE PAPER BOOK AND SUBMITTED THAT IT IS A CERTIFIED TRUE COPY OF T HE BOARD RESOLUTION BY WHICH THE BOARD HAS RESOLVED TO PAY RENT OF RS. 60, 000/- FOR UTILIZING THE OFFICE PREMISES OF THE DIRECTOR. WE FIND THAT THE S AME RENT HAS BEEN INCLUDED BY THE DIRECTOR IN HIS RETURN OF INCOME AN D AS MENTIONED HEREINABOVE, BOTH THE COMPANY AND THE DIRECTOR ARE TAXED AT THE SAME RATE, THERE CANNOT BE ANY TAX BENEFIT TO THE ASSESS EE-COMPANY AS ENVISAGED BY THE REVENUE AUTHORITY. IT IS ALSO NOT THE CASE OF THE REVENUE AUTHORITIES THAT THE ASSESSEE-COMPANY HAS N OT USED THE PREMISES TAKEN ON RENT FROM THE DIRECTOR. 13. CONSIDERING ALL THESE FACTS IN TOTALITY AND AS NO COMPARABLES ARE BROUGHT ON RECORD TO SHOW THAT PAYMENT OF RENT IS U NREASONABLE OR EXCESSIVE, WE DO NOT FIND ANY REASON TO SUSTAIN THE ADDITION, FINDINGS OF THE LD. CIT(A) ARE REVERSED. THE AO IS DIRECTED TO ALLOW THE CLAIM OF DEDUCTION OF RENT AT RS. 60,000/-. ITA NO. 7940/MUM/2010 7 14. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. 6 17 61 0 8 '91 ORDER PRONOUNCED IN THE OPEN COURT ON 27.11.2012 . &5 0 4( % 8 :&7 27.11.2012 4 0 ; SD/- SD/ (H.L. KARWA) (N.K. BILLAIYA) /PRESIDENT % &' / ACCOUNTANT MEMBER MUMBAI; :& DATED 27.11.2012 . . ./ RJ , SR. PS &5 &5 &5 &5 0 00 0 -1! -1! -1! -1! ; -1 , , / DR, ITAT, MUMBAI 6. ;? / GUARD FILE. &5 &5 &5 &5 / BY ORDER, .!1 -1 //TRUE COPY// @ @@ @ / A A A A * * * * (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI