Vildirect: IncomeTax-caselaws-2008-VIL-415-ITAT-NGR

2008-VIL-415-ITAT-NGR

Equivalent Citation: [2009] 121 TTJ 761, [2009] 117 ITD 260, [2009] 316 ITR (A. T.) 422

Income Tax Appellate Tribunal NAGPUR

ITA No. 93/Nag/2007

Date: 27.10.2008

JAGADAMBA ROLLERS FLOUR MILL LIMITED.

ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 1 (2) , RAIPUR.

BENCH

Member(s) : K. C. SINGHAL., HEMANT SAUSARKAR.

JUDGMENT

Per Hemant Sausarkar, Judicial Member.-The appeal is directed at the instance of the assessee against the order of the learned CIT(Appeals).

2. The Assessing Officer while passing the assessment order under section 143(3) vide order dated 11-8-2006 has made addition of Rs. 60,000 out of Director's remuneration as discussed in para 4 of the order and directed for charging interest under sections 234B and 234C while arriving at a total taxable income for Rs. 4,40,830.

3. In the appeal before the learned CIT(Appeals), the learned CIT(Appeals) has sustained the addition as discussed in ground No. 1 on pages 2 and 3 and confirmed the finding of Assessing Officer for disallowance by invoking section 40A(2)(b) of the Act. The assessee is in appeal before us.

4. The assessee has raised only one ground for disallowance of Rs. 60,000 and filed a Resolution of Meeting of the Board of Directors. It was submitted that as per the provisions of Companies Act section 317, a qualified person can be whole-time Director in two Companies and the Director was paid Rs. 20,000 and no other perquisite allowable to him. The payment was lump sum. The Director is MBA from Pune University and looks day-to-day affairs, it is admitted by the learned counsel for the assessee that during the previous year the same person was paid Rs. 10,000. But looking to the contribution by the Director the increase was made by resolutions of the Company. The increase of Rs. 10,000 per month to Rs. 20,000 per month is looking to the contribution of the Director. Therefore, the disallowance is unjustifiable and relied on order in Abbas Wazir (P.) Ltd. v. CIT [2003] 133 Taxman 702 (All.).

5. The learned Sr. DR submitted that during the previous year the same person was paid Rs. 10,000 and there were no circumstances to prove before the Assessing Officer for increase in the salary of the Director. Therefore, orders of the Assessing Officer and the learned CIT(Appeals) may be confirmed. The Assessing Officer has arrived at a conclusion that the salary paid to the Director for the year under consideration is beyond reasonableness by invoking section 40A(2)(b).

6. We have heard the rival submissions and perused the record. The assessee is in the business of manufacturing sponge iron and closely held company registered under Companies Act. The appointment of the Director is made as per resolution passed by Board of Directors in their meeting on 30-9-2003. There was no violation of section 37 of the Companies Act. The Director, Mr. Aditya Goel, who is also assessee was paid Rs. 20,000 per month lump sum to look after production, sales, administration, finance and legal compliances without any perquisite since Mr. Aditya Goel is Director in Ind. Agro Synergy Ltd. It is the prerogative of the company to run and manage the daily affairs of the company including pay of the Directors/officers subject to contribution and reasonableness within provisions of the relevant Act. The learned counsel of the assessee has brought on record the provisions of section 37 of the Companies Act and Board of Directors Resolution and submitted that keeping in view the contribution of the Directors, turnover of the Company and its profitability, there is no unreasonable payment to Shri Aditya Goel, Director, who is qualified one and discharging day-to-day duty to the satisfaction of the Board of Directors.

7. It is not the prerogative of the revenue to disallow the expenditure unless proved for non-business, excessive and for personal purpose. The payment to the Director was made as per resolution within the provisions of Companies Act which prevails over Income-tax Act. The revenue cannot be replaced for Board of Directors. It is prerogative of the Board of Directors to run the industry in the national interest keeping in view the social responsibility.

8. Since the increase in the salary was supported by Board of Directors Resolution and there is no embargo under the Companies Act to have Directorship in two companies and the payment made to the Director after having increase in turnover and profitability of the company during the relevant assessment year which is brought on record by the assessee on paper book page 7. Therefore, we conclude that the increased payment is due to commercial exigency and not unreasonable. Our view get support from orders in Addl. CIT v. Kuber Singh Bhagwandas [1979] 118 ITR 379 (MP)(FB), CIT v. Sinnar Bidi Udyog Ltd. [2002] 123 Taxman 559 (Bom.) and CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254 ITR 377 (Delhi). The Assessing Officer and the learned CIT-DR has not brought on record any reason for disallowing the higher payment being personal benefit or not for business purpose.

9. Therefore, we are of the definite view that the disallowance made by the Assessing Officer and confirmed by the learned CIT(Appeals) in appeal is unjustified and unreasonable, to be set aside.

10. In the result, the appeal of the assessee is allowed.

Per P.M. Jagtap, Accountant Member.-This appeal by the assessee is directed against the order of the learned CIT(Appeals), Raipur dated 23-11-2006 and in the solitary ground raised therein, the assessee has disputed the addition of Rs. 60,000 made by the Assessing Officer and confirmed by the learned CIT(Appeals) by way of disallowance out of Director's remuneration under section 40A(2)(a).

2. The assessee in the present case is a company which is engaged in the business of running a Roller Flour Mill. The return of income for the year under consideration was filed by it on 252004 declaring total income of Rs. 3,08,380. During the course of assessment proceedings, it was noticed by the Assessing Officer on examination of books of account that the assessee-company has paid remuneration of Rs. 2,40,000 to its Director, Shri Aditya Goel as against remuneration at Rs. 10,000 per month paid to him in the immediately preceding year. When the assessee-company was called upon by the Assessing Officer to justify the said increase in Director's remuneration, it was submitted on its behalf that the said Director has vast knowledge in the field of business and financial management being M.B.A. from Pune and the nature and extent of services rendered by him to the company fully justified the increase in his remuneration. It was, however, noted by the Assessing Officer from the facts borne out from record that its business was actually restricted by the assessee-company during the year under consideration by discontinuing the own manufacturing activities and carrying out only the job work of its sister concern. It was also noted by the Assessing Officer that Shri Aditya Goel was also a working Director in M/s. Ind Agro Synergy Ltd. and was fully engaged in installation and commencement of business of Sponge Iron Unit of the said concern at Raigarh during the year under consideration. Keeping in view all these relevant facts of the case, the Assessing Officer held that the remuneration of Rs. 2,40,000 paid by the assessee to Shri Aditya Goel was unreasonable and excessive at least to the extent of Rs. 60,000 and accordingly the same was disallowed by him invoking the provisions of section 40A(2)(a). The matter was carried before the learned CIT(Appeals) and after considering the submissions made on behalf of the assessee-company before him as well as the relevant material on record, he confirmed the disallowance of Rs. 60,000 made by the Assessing Officer for the following reasons given on page Nos. 2 and 3 of his impugned order:

"It has been seen that the appellant is a closely held company and controlled by various member of Goel family. In case of the sister concern Ind Agro Synergy Ltd., the same director Shri Aditya Goel has been shown as a full timer and was made payment of salary there. In the case of the present appellant, the same director has been shown again as a full time director and as an appreciation to job rendered by him, remuneration has been increased from Rs. 10,000 to Rs. 20,000 p.m. during the present period. Again the argument was put forth that the director is a MBA degree holder from Pune. The appellant has not made any advertisement for recruitment of young MBA holders for its business. It has decided to recruit the family member as director and it has already been stated that the appellant is closely held company running by the Goel group. As there was no recruitment from general public, hence the merit of the incumbent was not tested but he has been given the post director not because of his management skill but because of the fact that he belongs to the member of same family. As the company is engaged in various business activities through various concern, the same man has to be shown as director in several other concerns. On one side, the appellant in case of his sister concern has admitted that the said director Shri Aditya Goel was full time director and fully engaged in installation and commencement of the business of Sponge Iron, on the other side again the same argument was taken that he has fully engaged in the business of the present appellant. His salary has been increased from Rs. 10,000 to Rs. 20,000 p.m.

The Assessing Officer has brought material evidence on record and he has critically discussed all relevant points and thereafter he has disallowed only Rs. 5,000 out of Rs. 20,000 p.m. i.e., he has disallowed Rs. 60,000 from the remuneration of the director by invoking section 40A(2)(b) of the Act. The Assessing Officer is very much in his power to invoke such provision in the present case. Hence the action of the Assessing Officer is sustained."

Aggrieved by the order of the learned CIT(Appeals), the assessee is in appeal before the Tribunal.

3. We have heard the arguments of both the sides and also perused the relevant material on record. It is true, as contended by the learned counsel for the assessee before us, that the quantum of remuneration to be paid to his employees is to be decided generally by the assessee as a businessman. However, when it comes to the payment made to the persons specified in section 40A(2)(b), the Assessing Officer is empowered to look into and consider the reasonability of such payments and if the same is found to be excessive or unreasonable, he can disallow the same to the extent such payment is found to be excessive or unreasonable. In the present case, remuneration in question was paid by the assessee-company to its Director, Shri Aditya Goel who admittedly is a person covered under section 40A(2)(b) and the payment of remuneration made to him, therefore, was liable to be examined under the provisions of section 40A(2)(a) as rightly done by the Assessing Officer. The said person was admittedly paid a remuneration at the rate of Rs. 10,000 per month during the immediately preceding year which was increased to Rs. 20,000 per month during the year under consideration. Before the Assessing Officer, the assessee could not offer any satisfactory explanation justifying the said substantial increase except stating that he was holding a MBA degree from Pune. As rightly contended by the learned DR before us, Shri Aditya Goel was holding the same degree even in the immediately preceding year when his salary paid by the assessee was at the rate of Rs. 10,000 per month and this aspect alone, therefore, could not be accepted as the reason for increasing his remuneration substantially as rightly held by the authorities below. Another aspect pointed out by the Assessing Officer in this regard was that Shri Aditya Goel was also working as a full time Director with M/s. Ind Agro Synergy Ltd., a sister concern of the assessee-company and was fully engaged in installation and commencement of business of Sponge Iron of the said concern at Raigarh during the year under consideration. It is no doubt true that there is no bar for Shri Aditya Goel to work as full time Directors of two companies simultaneously as submitted by the learned counsel for the assessee before us. However, this aspect was material to clearly indicate that the increase in his remuneration by the assessee-company from Rs. 10,000 per month to Rs. 20,000 per month was not justifiable and the same was excessive and unreasonable. Similarly, the discontinuation of manufacturing activity by the assessee-company and restricting its business only to carrying out of job work of its sister concern again was sufficient to show that the remuneration paid by the assessee-company to Shri Aditya Goel at the rate of Rs. 20,000 per month was excessive and unreasonable. As such considering all the facts and circumstances of the case, we are of the view that the disallowance of Rs. 60,000 made by the Assessing Officer out of remuneration paid by the assessee-company to its Director invoking the provisions of section 40A(2)(b) was sustainable and the learned CIT(Appeals) was fully justified in confirming the same. His impugned order on this issue is, therefore, upheld dismissing this appeal filed by the assessee.

4. In the result, the appeal of the assessee is dismissed.

ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961

Per Hemant Sausarkar, Judicial Member.-It is submitted that the order dictated by learned Accountant Member, Shri P.M. Jagtap is placed for consideration. Since I have found the order is not within the provisions of the Act, therefore, I am submitting dissenting order in the appeal for consideration to your honour to refer the issue/ground to be adjudicated by Third Member as under:

"On the basis of facts and records, whether the disallowance of Rs. 60,000 confirmed by the learned CIT(Appeals) is justified keeping in view the reasonableness and business exigency of the assessee." (Ground No. 3 in ITA No. 93/Nag./2007).

Per P.M. Jagtap, Accountant Member.-I agree with the above question framed by the ld. JM. This matter may now be placed before the Hon'ble President along with the leading order proposed by me and the dissenting order passed by ld. JM for making a reference to a Third Member.

THIRD MEMBER ORDER

Per K.C. Singhal, Vice President (As a Third Member).-The Hon'ble President, Income-tax Appellate Tribunal has nominated, under section 255(4) of the Income-tax, 1961 ('the Act'), the Vice-President (Mumbai Zone) to express his opinion on the following question arising on account of difference of opinion between the Members constituting the Division Bench:

"On the facts and records whether the disallowance of Rs. 60,000 confirmed by the learned CIT(A) is justified keeping in view the reasonableness and business exigency of the assessee". (Ground No. 3 in ITA No. 93/Nag./2007)

2. At the outset, it may mentioned that Shri P.C. Maloo Jain, Counsel for the assessee, sent a fax on 13-10-2008 seeking adjournment by stating as under:

"1. That the above case has been fixed on 14-10-2008.

2. That the undersigned, who has to represent the cases, shall be at outstation on 13/14-10-2008 and also on 20/21-10-2008 for attending the cases before Hon'ble Settlement Commission of Income-tax and Wealth Tax, Additional Bench, Kolkata. It is, therefore, the undersigned shall not be able to appear before the Hon'ble Bench on appointed date.

3. That the President of Income-tax Bar Association, Raipur, with reference to his telephonic talk with the Hon'ble President of ITAT, has informed that the Bench is likely to Camp at Raipur from 17-11-2008 onwards. It is, therefore, earnestly requested to re-fix the case in Raipur Camp."

The request of the counsel for the assessee is uncalled for since the Division Bench at Raipur cannot hear the matter which was to be heard by Third Member nominated by the Hon'ble President, ITAT. Accordingly, The Registry was directed to contact the counsel for the assessee on telephone and inform that such request cannot be acceded to and the adjournment, if any, can be given for a day or two. In pursuance of the said direction, the Registry has put a note dated 13-10-2008 wherein it has been stated that the counsel for the assessee was unable to attend on the fixed date and he had no objection if the case is heard ex parte. In view of the same the undersigned has proceeded to hear the appeal ex parte on the fixed date i.e., 14-10-2008.

It may also be mentioned that none appeared on behalf of the revenue despite proper service of notice. Even no application for adjournment has been filed on behalf of the revenue.

In view of the above, I proceed to express my opinion after considering the reasons given by both the Members.

3. The facts of the case has already been narrated by the learned Accountant Member in his order. However, it would be appropriate to narrate briefly the relevant facts even at the cost of repetition. The assessee is a company engaged in the business of running a Roller Flour Mill. In the course of assessment proceedings, it was noticed by the Assessing Officer that remuneration of Rs. 2,40,000 was paid to the Director, Shri Aditya Goel, as against remuneration of Rs. 10,000 per month paid in the immediately preceding year. The assessee was asked to justify the increase in the salary. This explanation of the assessee was that the said Director had vast knowledge in the field of business and financial management being M.B.A. from Pune and the nature and extent of services rendered by him to the company fully justified the increase in his remuneration. The Assessing Officer noted that the assessee had discontinued its manufacturing activities and instead carried on the job work of its sister concern. It was also noted that Shri Aditya Goel was also working director in M/s. Ind Agro Synergy Ltd., where he was fully engaged in installation and commencement of business of Sponge Iron Unit of the said concern. In view of these facts, the Assessing Officer was of the view that the increase in the salary to Shri Aditya Goel was excessive to the extent of Rs. 60,000. Consequently, disallowance under section 40A(2)(a) was made to the extent of Rs. 60,000 which was also upheld by the CIT(A). Aggrieved by the same, the assessee filed appeal before the Tribunal.

4. The Members constituting the Bench, however, differed on this issue. The learned Accountant Member agreed with the contention of the assessee's counsel that the quantum of remuneration to be paid to its employees is to be decided generally by the assessee as a businessman. However, he was of the view that when the payment is made to the persons specified in section 40A(2)(b), the Assessing Officer is empowered to look into and consider the reasonability of such payments and if the same is found to be excessive or unreasonable, he can disallow the same to the extent such payment is found to be excessive or unreasonable. Since the provisions of section 40A(2)(b) were attracted, such payment was liable to be examined under the said provision. After considering the facts recorded by the Assessing Officer, the learned Accountant Member upheld the addition made by the Assessing Officer.

5. On the other hand, the learned Judicial Member was of the view that no disallowance could be made under section 40A(2)(a) of the Act inasmuch as the remuneration paid to Shri Aditya Goel, director of the assessee-company could not be said to be excessive or unreasonable since (i) the appointment of the director was made as per the resolution passed by the Board of Directors in their meeting held on 30-9-2003, (ii) that Shri Goel was to look after the production, sales, administration, finance and legal matters without any perquisites, (iii) that it is the prerogative of the company as how to run and manage the daily affairs of the company and, therefore, the same could not be challenged and (iv) that increase in the salary was supported by the resolution passed by the Board of Directors as usual and there is no embargo under the Companies Act to have directorship in two companies. In view of the same, it was held by him that the payment of remuneration to the directors could not be said to unreasonable in view of the various decisions in Kuber Singh Bhagwandas' case, Sinnar Bidi Udyog Ltd.'s case and Dalmia Cement (Bharat) Ltd.'s case.

6. In view of the above difference of opinion, the point of difference has been referred to the Third Member by the Hon'ble President of the Income-tax Appellate Tribunal.

7. After going through the orders of the learned Members as well as the orders of the lower authorities, I am of the view that no disallowance was required to be made for the reasons given hereafter. The question for consideration is whether on facts of the case, the disallowance was justified in view of the specific provisions' of section 40A(2)(a) of the Act. It would be appropriate to reproduce the relevant portion of the said provision below:

"40A. (1) The provisions of this section shall have effect not withstanding anything to the contrary contained in any other provisions of this Act relating to the computation of income under the head "Profits and gains of business or profession."

"40A. (2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure 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 of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction."

8. Perusal of the above provisions shows that such provisions are non obstante provisions and, therefore, have an overriding effect over the other provisions allowing the deductions. This provision presupposes allowability of the expenditure otherwise. If the expenditure is not allowable under the provisions of sections 28 to 39 then the question of making disallowance under section 40A would not arise. It is only in these cases where the deduction is allowable under sections 28 to 39 but the expenditure is found to be excessive or unreasonable, the disallowance under section 40A can be made if payment on account of expenditure is made to the persons specified under sub-section (2)(b) of section 40A of the Act. The expenditure on account of remuneration paid to employees is governed by the provisions of section 37 of the Act. According to the said section, the expenditure is allowable if it is incurred wholly and exclusively for the purpose of business. It is not in dispute that such expenditure is otherwise allowable under section 37 of the Act. However, apart of the expenditure can be disallowed if it is shown - (i) that the payment was made to the persons specified in clause (b) of section 40A(2) of the Act and (ii) If it is found that expenditure is excessive or unreasonable, having regard to the fact that the market value of the goods, services or facilities for which the payment is made. Undisputedly, the payment to the director falls under clause (b) of section 40A of the Act and, therefore, the Assessing Officer was duty bound to make enquiry whether such expenditure was excessive or unreasonable having regard to the fair market value of the services rendered. To that extent, I am in agreement with the observations of the learned Accountant Member. However, no enquiry was made by the Assessing Officer to ascertain whether the payment was excessive or unreasonable having regard to the fair market value of the services. On the other hand, the Assessing Officer made the enquiry in a different direction i.e., whether the increase in the salary as compared to the salary paid to last year was justified on facts or not. Such enquiry, in my view, is not required to be made as per the provisions of section 40A(2)(a). The scope of enquiry under the above provision is with reference to the fair market value of the services rendered. In the absence of enquiry as contemplated by the provisions of section 40A(2)(a), no disallowance could have been made or sustained. The onus was on the Assessing Officer to bring the material on record to prove that the payment made by the assessee was excessive or unreasonable having regard to the fair market value of the services rendered. If some material! evidence is brought on record to indicate that payment appeared to be excessive or unreasonable then the onus would shift to the assessee to prove that the payment was not excessive or unreasonable. Since no enquiry as contemplated by the aforesaid provisions was made on this account, it cannot be said that the payment was excessive or unreasonable. Therefore, I find myself in agreement with the conclusions arrived at by the Learned Judicial Member though for different reasons.

9. The matter may now be placed before the Division Bench for disposal of the appeal.

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