DCIT, Ludhiana V. M/s EBI Cremica Food Coatings (P) Ltd., Ludhiana

ITA 886/CHANDI/2012

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 68432 (ITAT-CHANDIGARH)
• Duration Of Justice: 11 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-08-2013
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 13-08-2013
• Assessment Year: 2009-2010
• Appeal Filed On: 28-08-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SUBHASH AGGARWAL
• Keywords: Commercial expediency
• Section: 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES B CHANDIGARH BEFORE SHRI T.R. SOOD, ACCOUNTANT MEMBER AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER ITA NO. 886/CHD/2012 ASSESSMENT YEAR: 2009-10 THE DCIT, VS. M/S EBI CREMICA FOOD COATINGS(P) CIRCLE III LTD., G.T. ROAD(WEST) LUDHIANA LUDHIANA PAN NO. AAACE3690D (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI AKHILESH GUPTA RESPONDENT BY : SHRI SUBHASH AGGARWAL DATE OF HEARING : 13/08/2013 DATE OF PRONOUNCEMENT : 23/08/2013 ORDER PER T.R.SOOD, A.M. THE APPEAL FILED BY THE REVENUE IS DIRECTED AGAINST THE ORDER PASSED BY THE CIT(A)-I, LUDHIANA DATED 18.06.2012. 2. IN THIS APPEAL, FOLLOWING GROUNDS HAVE BEEN TAK EN BY THE REVENUE:- 1. THAT THE LD. CIT(A) HAS ERRED IN LAW AND O N FACTS IN DELETING THE ADDITION OF RS. 30,00,000/- MADE BY TH E A.O. ON ACCOUNT OF EXCESS SALARY PAID TO SH. AJAY BECTOR MA NAGING DIRECTOR COVERED UNDER THE DEFINITION OF SPECIFIED PERSONS U/S 40A(2)(B) OF I.T. ACT, 1961. 2. THAT THE LD. CIT(A) HAS ERRED IN LAW AND ON FAC TS IN DELETING THE ADDITION OF RS. 3,60,000/-, WHICH WAS DISALLOWED BY THE A.O. APPLYING PROVISIONS OF SECTION U/S 40A( 2)(B) OF I.T. ACT, 1961 IN THE ABSENCE OF EVIDENCE THAT THE LEASE D AREA HAS INCREASED FROM 2650 SQ. FT. TO 9650 SQ .FT. 2 3. THAT THE LD. CIT(A) HAS ERRED IN LAW AND ON FACT S IN DELETING THE ADDITION OF RS. 1,00,000/-, WHICH WAS DISALLOWED BY THE A.O. IN THE ABSENCE OF EVIDENCE I.E. BILLS O F HOTEL STAY, LOCAL CONVEYANCE, LOCAL EXPENSES AND EVEN DOCUMENT WHICH MAY SHOW THAT ALL THE VISITS TO THE FOREIGN COUNTRY FOR BUSINESS PURPOSES. 4. THE ORDER OF THE LD. CIT(A) BE SET ASIDE AND THA T OF A.O. BE RESTORED. 3. AFTER HEARING BOTH THE PARTIES WE FIND THAT DURI NG ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS PAID AS SUM OF RS. 60 LAKHS AS REMUNERATION OF SHRI AJAY BECTOR , DIRECTOR. THE ASSESSING OFFICER NOTICED THAT IN COMPARISON A SUM OF RS. 42 LAKHS WAS PAID IN ASSESSMENT YEAR 2008-09 AND RS. 30 LAKHS IN ASSESS MENT YEAR 2007-08. AFTER DETAILED DISCUSSION HE WAS OF THE OPINION THA T REMUNERATION WAS EXCESSIVE AND WAS IN VIOLATION OF THE PROVISIONS OF SECTION 40A(2) (B) OF THE ACT. ACCORDINGLY, HE DISALLOWED 50% OF THE SALARY AMOUNTING TO ` 30 LAKHS. 4. ON APPEAL, BEFORE CIT(A) IT WAS MAINLY CONTENDED THAT SHRI AJAY BECTOR HAS EXPERIENCE OF MORE THAN 32 YEARS AND HAS BEEN VCE CHAIRMAN OF FOOD AND AGRICULTURAL BUSINESS COMMITTEE OF CII, N ORTHERN REGION. HE IS ALSO MEMBER OF THE BOARD OF GOVERNORS OF APEEJAY IN STITUTION OF MANAGEMENT AND CHAIRMAN OF AGRICULTURAL BUSINESS C OMMITTEE OF PHD CHAMBER OF COMMERCE. IT WAS FURTHER SUBMITTED THAT ASSESSEE COMPANY WAS A JOINT VENTURE WITH EBI FOODS LTD. U.K. WHICH IS A RENOWNED COMPANY. THE SALARY WAS APPROVED BY THE JOINT VENTURE COMPAN Y I.E BY INDEPENDENT BODY. IT WAS ALSO POINTED OUT THAT CERMICA GROUP H AD TRANSFERRED ITS HORDING TO M/S KARRY GROUP B.V. NETHERLANDS AND SHRI AJAY BECTOR WAS STILL RETAINED AS DIRECTOR TILL DECEMBER 2011 AT A SALARY OF RS. 7.5 LAKHS PER MONTH. ALL THESE FACTS CLEARLY SHOW THAT SALARY WA S JUSTIFIED. 3 5. THE LD. CIT(A) WAS SATISFIED WITH THE SUBMISSION S AND ACCORDINGLY HE DELETED THE ADDITION. 6. BEFORE US, LD. DR REFERRED TO PARAS 5 TO 5.13 AN D POINTED OUT VARIOUS OBJECTIONS RAISED BY ASSESSING OFFICER FOR NOT ALLO WING SALARY. HE STRONGLY SUPPORTED THIS ORDER. 7. ON THE OTHER HAND, LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE CIT(A). HE ALSO POINTE D OUT THAT IDENTICAL ISSUE HAS ALREADY BEEN ADJUDICATED BY THE TRIBUNAL FOR AS SESSMENT YEAR 2007-08 AND DECIDED THE SAME IN FAVOUR OF THE ASSESSEE. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFUL LY AND FIND THAT IDENTICAL ISSUE IN ASSESSEES OWN CASE WAS CONSIDER ED BY THE TRIBUNAL VIDE ITA NO.969/CHD/2012 VIDE PARA 9, WHICH READS AS UND ER:- 9 AFTER EXAMINING THE RIVAL SUBMISSIONS WE FIND TH AT THE LD. CIT(A) HAS CORRECTLY ADJUDICATED THE ISSUE. FIRSTLY THE ASSESSING OFFICER HAS WRONGLY OBSERVED THAT THE ASSESSEE IS A FAMILY CONCERN BECAUSE THE ASSESSEE I S A JOINT VENTURE COMPANY ON 50-50 BASIS WITH FOREIGN COMPANY KNOWN AS EBI FOODS LTD. UK WHICH IS PART OF DEAN FOODS LTD WHICH IS A GLOBAL MNC BEING PART OF THE FORTUNE 500 COMPANY. FURTHER THE SALARY WAS APPROV ED BY MR. E.J.D. FOX WHO IS THE CHAIRMAN OF THE COMPANY A ND WAS NOT RELATED TO SHRI AJAY BECTOR. IN ANY CASE A S OBSERVED BY THE LD. CIT(A), NO COMPARABLE CASE HAS BEEN BROUGHT ON RECORD TO SHOW THAT SALARY PAID BY THE ASSESSEE-COMPANY TO SHRI AJAY BECTOR IS EXCESSIVE. SALARY OF THE DIRECTOR CAN NOT BE COMPARED WITH ORDINARY EMPLOYEE. SHRI AJAY BECTOR IS HAVING AN EXPERIENCE OF 30 YEARS IN FOOD BUSINESS AND IS ALSO MEMBER OF VARIOU S CHAMBERS OF COMMERCE AND ASSOCIATIONS AS POINTED OU T IN THE REPLY GIVEN BY THE ASSESSEE BEFORE THE ASSESSIN G OFFICER. THEREFORE, IN OUR OPINION, THE LD. CIT(A) HAS 4 CORRECTLY ADJUDICATED THE ISSUE AND HIS ORDER, DOES NOT REQUIRE ANY INTERFERENCE. 9. WE FURTHER FIND THAT DURING THIS YEAR THE LD. CI T(A) HAS ADJUDICATED THIS ISSUE VIDE PARA 4, WHICH IS AS UNDER:- 4. I HAVE CONSIDERED THE BASIS OF ADDITION MADE B Y ME AO AND THE ARGUMENTS OF THE AR ON THE ISSUE. FIRST OF ALL IT NEEDS TO BE APPRECIATED THAT THE ASSESSEE COMPANY IS NOT A GROUP COMPANY/ENTITY OF CREMICA GROUP AS IT IS A 50%-50% JOINT VENTURE BETWEEN M/S EBI FOOD LIMITED OF UK AND VARI OUS INDIVIDUALS/ENTITIES OF CREMICA GROUP TOGETHER HOLD ING THE REST OF 50%. MR. AJAY SECTOR HOLDS ONLY 6.28% SHARES IN THE ASSESSEE COMPANY AND EVEN IN M/S CREMICA INDUSTRIES LIMITED HIS SHARE HOLDING IS ONLY 7.13%. IT, THEREFORE, BEC OMES VERY CLEAR THAT SH. AJAY SECTOR DOES NOT BECOME A SPECIF IED PERSON AS DEFINED U/S 40A(2). THEREFORE, THE BASIS PREMISE OF THE ASSESSING OFFICER IN EVALUATING THE BUSINESS JUSTIF ICATION OF SALARY PAID TO SH. AJAY BECTOR, IS ERRONEOUS. IN FA CT THE BUSINESS PURPOSE OF THE SALARY PAID TO SH. AJAY BEC TOR OVER A PERIOD OF YEARS HAS TO BE APPRECIATED IN THE LIGHT OF THE FACT THAT THE SAME IS CONSIDERED ESSENTIAL BY THE 50% SH ARE HOLDERS OF THE COMPANY I.E. M/S EBI FOODS LIMITED WHO HAVE ONLY A BUSINESS RELATIONSHIP WITH THE INDIVIDUALS OF CREMI CA GROUP. ANOTHER IMPORTANT FACT WHICH NEEDS TO BE KEPT IN MI ND IS THAT WITH EFFECT FROM JANUARY 2011 THE SHARE HOLDING OWN ED BY ENTITIES OF M/S CREMICA, GROUP HAS BEEN TRANSFERRED TO M/S KARRY LIMITED B.V. NETHERLAND AND BY THIS RECONSTIT UTION THE BECTOR FAMILY EASED TO HAVE ANY OWNERSHIP INTEREST IN THIS VENTURE. THIS MEANT THAT THERE ASSOCIATION IS PUREL Y ON PROFESSIONAL GROUNDS WHICH BECOMES ALL THE MORE APP ARENT AS SH. AJAY BECTOR CONTINUES TO WORK FOR THE ASSESSEE COMPANY AS A DIRECTOR TILL DECEMBER 2011 WITH A SALARY OF RS. 7.5 LACS PER MONTH. IT IS ALSO SEEN THAT MR. AJAY BECTOR CONTINU ES TO BE PAID @ RS. 7.5 LACS PER MONTH AS A CONSULTANT EVEN AFTER DECEMBER 2011 WHEN HE CEASES TO BE THE DIRECTOR OF THE COMPANY. THESE FACTS CLEARLY SHOW THAT THE REMUNERA TION PAID TO SH. AJAY BECTOR IS ONLY ON ACCOUNT OF HIS SERVIC ES TO THE COMPANY AND NOT BECAUSE OF HIS BEING HAVING ANY OWN ERSHIP 5 INTERESTS. 10. WE ARE OF THE OPINION THAT LD. CIT(A) HAS CORRE CTLY ADJUDICATED THIS ISSUE PARTICULARLY IN THE LIGHT OF THE DECISION OF THE TRIBUNAL WHEREIN IT WAS CLEARLY HELD THAT IN SUCH A SITUATION THAT SECTION 40A(2) CANNOT BE INVOKED. THE REMUNERATION OF THE DIRECTOR HAS BEEN APPROVED BY THE INDEPENDENT BOARD OF DIRECTOR AND, THEREFORE, NO FAULT CAN BE FOUND WITH THE SAME. ACCORDINGLY, WE CONFIRM THE ORDER OF LD. CIT(A). 11. GROUND NO.2: DURING ASSESSMENT PROCEEDINGS, TH E ASSESSING OFFICER NOTICED THAT ASSESSEE HAD DEBITED A SUM OF RS. 8,85 ,000/- TOWARDS RENT PAID ON CREMICA INDUSTRIES (P) LTD IN COMPARISON OF RS. 3,60,000/- PAID LAST YEAR. THE ASSESSEE WAS ASKED TO FILE THE EXPLANATION FOR SUCH ABNORMAL INCREASE IN THE RENT IN COMPARISON TO LAST YEAR. IT WAS FURTHE R NOTICED THAT ASSESSEE HAD ALSO PAID RENT TOWARDS GENERATOR @ RS. 30,000/- PER MONTH. IN RESPONSE, IT WAS MAINLY STATED THAT W.E.F. 1.12.2008, THE ASSESS EE HAS TAKEN ON RENT AN AREA MEASURING OF 9650 SQ. FEET WHEREAS EARLIER THE TOTAL AREA TAKEN ON RENT WAS 2650 SQ. FEET AND, THEREFORE, RENT WAS JUSTIFIE D. 12. THE ASSESSING OFFICER WAS NOT SATISFIED WITH TH ESE SUBMISSIONS BY OBSERVING THAT THERE WAS NO EVIDENCE THAT AREA UNDE R OCCUPATION IS INCREASED FROM 2650 SQ. FEET TO 9650 SQ FEET BECAUSE AREAS IS NOT MENTIONED IN THE LEASE DEED DATED 1.12.2008. IT WAS FURTHER NOTED THAT PR EVIOUSLY THERE WAS NO LEASE AGREEMENT BUT STILL RENT WAS INCREASED FROM 9000 TO RS. 26,000/- FROM IST APRIL 2001 RETROSPECTIVELY VIDE MINUTES OF THE MEET ING DATED 7.2.2007. ACCORDING TO HIM, THE RENT WAS BEING INCREASED WITH OUT ANY COMMERCIAL EXPEDIENCY AND THEREFORE, HE DISALLOWED A SUM OF RS . 2,40,000/- BY OBSERVING THAT SINCE THERE IS A TALK TO INCREASE AR EA, HE ALLOWED FURTHER RENT @ RS. 60,000/- PER MONTH. 6 13. ON APPEAL, SUBMISSIONS MADE BEFORE ASSESSING OF FICER WERE REITERATED. ON CONSIDERATIONS OF THE SUBMISSIONS, LD. COUNSEL F OR THE ASSESSEE AGREED WITH THE SAME AND ALLOWED THE WHOLE RENT. 14. BEFORE US, LD. DR POINTED OUT THAT LD. COUNSEL FOR THE ASSESSEE HAS GIVEN RELIEF WITHOUT UNDERSTANDING THE FACT THAT TH ERE WAS NO MENTION OF THE ADDITIONAL AREA IN THE LEASE AGREEMENT. ON THE OTHE R HAND, LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE LD. CIT(A). 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY. WE HAVE ALSO PERUSED THE AGREEMENT OF LEASE, A COPY OF WHICH IS FILED AT PAGES 19 TO 23 OF THE PAPER BOOK. WE FIND THAT SURPRISINGLY THE AREA WHICH HAS BEEN LET OUT HAS NOT BEEN MENTIONED IN THE LEASE DEED. THE LD. COUN SEL HAD OBJECTED TO THIS OBSERVATION AND SUBMITTED THAT PLAN WAS ENCLOSED. SINCE AREA IS NOT MENTIONED IN THE LEASE DEED, THEREFORE, IN THE INTE REST OF JUSTICE, WE SET ASIDE THE ORDER OF LD. CIT(A) AND REMIT THE MATTER BACK T O THE FILE OF ASSESSING OFFICER WITH A DIRECTION TO GIVE ANOTHER OPPORTUNIT Y TO ASSESSEE TO SUBSTANTIATE ITS CLAIM THAT HOW MUCH AREAS HAS BEEN TAKEN ON LEASE BY ANY OTHER EVIDENCE. THE ISSUE SHOULD BE DECIDED BY EXA MINING BY ANY EVIDENCE WHICH MAY BE FURNISHED BY THE ASSESSEE. 16. GROUND NO.3 : AFTER HEARING BOTH THE PARTIES WE FIND THAT DURIN G ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICE D THAT ASSESSEE HAS DEBITED SOME AMOUNT TOWARDS DIRECTORS TRAVELLING. ON ENQUIRY, IT WAS SUBMITTED THAT SHRI AJAY BEACTOR HAD TOURED THILAND AND SINGAPORE FROM 18.2.2009 TO 25.2.2009 TO ATTEND A MEETING WITH TH E MANAGER OF COLLABORATORS AT THE THAILAND PLANT. FURTHER, A TRI P WAS ALSO UNDERTAKEN TO USA BY SHRI AJAY BECTOR TO EXAMINE THE FACILITIES O F MCDONALD TO LEARN THE METHODS OF PRODUCTION OF BREAD WHICH IS SUPPLIED TO THE MC DONALD. THE 7 ASSESSING OFFICER NOTED THAT NO FURTHER DETAILS HAV E BEEN FILED; THEREFORE, HE DISALLOWED A SUM OF RS. 1 LAKH OUT OF DIRECTORS TR AVELLING. 17. THE ABOVE ADDITION WAS DELETED BY LD. CIT(A) BY OBSERVING THAT THIS WAS AN ADHOC ADDITION. 18. BEFORE US, LD. DR SUBMITTED THAT ASSESSEE HAS N OT FILED ANY DETAILS LIKE COPY OF AIR TICKETS, HOTEL BILLS ETC TO SUBSTANTIAT E THE EXPENSES. 19. ON THE OTHER HAND LD. COUNSEL SUBMITTED THAT AD DITION HAS BEEN MADE ON ADHOC BASIS WHICH IS NOT PERMISSIBLE UNDER LAW. 20. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY AND FIND FORCE IN THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE. THE VERY FACT THAT THE ASSESSING OFFICER HAS MERELY DISALLOWED A SUM OF RS . 1 LAKH OUT OF THE TOTAL EXPENSES SHOWN WOULD SHOW THAT ASSESSING OFFICER HA D ADMITTED THE GENUINENESS OF EXPENSES AS WELL AS NECESSITY FOR FO REIGN TRAVELLING OF THE DIRECTOR SHRI AJAY BECTOR THE ADDITION HAS BEEN MA DE PURELY ON ADHOC BASIS WHICH IS NOT PERMISSIBLE UNDER THE LAW AND ACCORDIN GLY THE SAME IS DELETED. 21. IN THE RESULT, REVENUES APPEAL IS PARTLY ALLOW ED. ORDER PRONOUNCED IN THE OPEN COURT ON 23.8.2013 SD/- SD/- (SUSHMA CHOWLA) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMER DATED : 23 RD AUGUST, 2013 RKK COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR TRUE COPY BY ORDER ASSISTANT REGISTRAR\ 8 9