IN THE INCOME TAX APPELLATE TRIBUNAL DELHI `G' BENCH
BEFORE SHRI G.C. GUPTA,VP AND SHRI A.N. PAHUJA,AM
ITA no.4631/Del./2011
Assessment year: 2008-09
DCIT,Circle-9(1),Room Vs. M/s Spark Hotels Pvt. Ltd.,
no.163, C.R. Building,IP B-6/17, Safdarjang Enclave,
Estate, New Delhi New Delhi
[PAN AAJCS 6454 Q]
(Appellant) (Respondent)
Assessee by None
Revenue by Smt. Surjani Mohanty,DR
Date of hearing 07-06-2012
Date of pronouncement 22-06-2012
ORDER
A.N. PAHUJA :- This appeal filed on 20.10.2011 by the Revenue against an
order dated 29.06.2011 of the CIT(A)-XII, New Delhi, raises the following
grounds:-
1) "The ld. CIT(A) erred in law and on facts of the case in deleting the
addition of ``30 lacs on account of Directors remuneration by
invoking the provisions of section 40A(2)(b).
2) The appellant craves to amend, modify, alter, add or forgo any
ground of appeal at any time before or during the hearing of this
appeal."
2. At the outset, none appeared before us on behalf of the assessee nor
submitted any request for adjournment. Considering the nature of issue and
findings of the ld. CIT(A), the Bench proceeded to dispose of the appeal after
hearing the ld. DR.
3. Facts, in brief, as per relevant orders are that return declaring nil
income after adjusting brought forward loss of ``10,74,016/-. under the normal
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provisions and book profits of `8,67,496/- in terms of the provisions of section
115JB of the Income-tax Act, 1961 (hereinafter referred to as the Act) filed on
22.09.2008 by the assessee, running a hotel, was selected for scrutiny with the
service of a notice u/s 143(2) of the Act. During the course of assessment
proceedings, the Assessing Officer[AO in short] noticed that even though the
assessee was engaged in the business of hotel, the assessee derived income
only from interest-``50,06,561/- and dividend- ``96,21,236/- in the year under
consideration while the assessee paid salary of `36 lacs to its director Shri
Patanjali Keswani, Director @ `3 lacs per month. Total expenses claimed
against interest income were `41,37,764/-. In the light of these facts, to a query
by the AO, seeking explanation as to reasonableness of salary paid to the
director in terms of provisions of the section 40A(2)(a) of the Act, the assessee
replied that Shri Patanjali Keswani was a highly qualified individual, having
B.Tech. from IIT and MBA from IIM beside having a experience of 15 years in
Taj Group Hotels as chief operating Officer and Vice President with A.T. Kearney
Inc. as their Director India. The remuneration paid to shri Keshwani was due to
business exigencies and substantial profits were earned by the assessee
company. Moreover, the assessee raised funds to the tune of ``28.93 crores,
deployed in giving loans, making investment in mutual funds and setting up of
hotels. Since shri Keshwani was paying tax at maximum rates, it could not be
said that payment of remuneration was made to avoid taxes. However, the AO
did not accept the submissions of the assessee and disallowed an amount of
``30 lacs, invoking the provisions of sec. 40A(2)(a) of the Act, considering the
salary of ``50,000/-pm paid to shri Keshwani, reasonable.
4. On appeal, the assessee reiterated their submissions before
the AO while relying upon decisions in Beta Naphthol (P) Ltd. Vs. Dy. CIT, 50
TTJ (Ind.) 375; Hathiwala Silk Mills Vs. Income-tax Officer,19 TTJ (Ahd.) 284;
Shriram Pistons & Rings Ltd. Vs. IAC,39TTJ (Delhi) 132 and CIT Vs. Walchand &
Co. (P) Ltd., 65 ITR 381 (SC).Inter alia, it was contended that an employer fixing
the remuneration, is entitled to consider the extent of business, the nature of
3 ITA No.4631/Del./2011
duties to be performed, the special aptitude of the employee, future prospects of
extension of the business and a host of other related circumstances. It is
erroneous to think that increased remuneration can only be justified if there is a
corresponding increase in the profits of the employer. Accordingly, it was argued
that disallowance made by the AO be deleted. In the light of these submissions,
the ld. CIT(A) deleted the addition, holding as under:-
"After considering the submissions given by the appellant as well as
observations made by the Assessing Officer I am of the opinion that
in order to make disallowance u/s 40A(2)(b) it is necessary that the
Assessing Officer should establish that benefits given to the related
parties are more than the fair market value. In this case the Director
Keshwani himself is a professional as he is B-Tech from IIT and as
well as MBA from IIM along with experience in Taj Group of Hotel
as Chief Operating Officer and Vice President with A.T. Kearney
Inc. as their Director India. The Director himself is a professional
who with his professional expertise steered the company and
earned profits well while comparing with the last two years.Hence,
the addition of 30 lacs is deleted"
5. The Revenue is now in appeal before us against the aforesaid findings of
the ld. CIT(A).The ld. DR supported the assessment order while relying upon the
decision in CIT vs. Eastern Condiments (P) Ltd., 325 ITR 251 (Kerala).
6 We have heard the learned DR and gone through the facts
of the case. As is apparent from the aforesaid facts, the issue before us is as to
whether remuneration paid to director of the company is excessive and
unreasonable and therefore ,could be disallowed u/s 40A(2)(a) of the Act. The
AO disallowed an amount of `30 lacs out of total salary of `36 lacs, in terms of
provisions of sec. 40A(2)(a) of the Act while the ld. CIT(A) deleted the
disallowance. Before proceeding further, we may refer to the provisions of
section 40A(2) (a) of the Act, the relevant portion of which read as follows :
"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 theAssessing Officer is of the opinion that such expenditure is
4 ITA No.4631/Del./2011
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."
6.1 A mere glance at the aforesaid provision reveals that the expenditure
mentioned therein is in relation to any person referred to in clause (b) of the sub-
section and the expenditure has to be considered in relation 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 the assessee therefrom. Hon'ble Gujrat High Court
observed in Coronation Flour Mills vs. ACIT,188 Taxman 257 that in relation to
the disallowance under the provisions of section 40A(2)(a) of the Act, a plain
reading of the provision reveals that where an assessee incurs any expenditure
in respect of which payment is required to be made or has been made to any
person referred to in clause (b) of section 40A(2) of the Act and the AO is of the
opinion that such expenditure is excessive or unreasonable having regard to (a)
fair market value of the goods, services or facilities for which the payment is
made; or (b) the legitimate needs of the business of the assessee; or (c) the
benefits derived by or accruing to the assessee on receipt of such goods,
services or facilities, then the AO shall not allow as a deduction so much of the
expenditure as is so considered by the AO to be excessive or unreasonable.
Therefore, it becomes apparent that the AO is required to record a finding as to
whether the expenditure is excessive or unreasonable in relation to any one of
the three requirements prescribed, which are independent and alternative to
each other. All the three requirements need not exist simultaneously. In a given
case, if any one condition is shown to be satisfied the provision can be invoked
and applied, if the facts so warrant. Thus, only so much of the expenses, if paid
to a person referred to in clause (b), are allowable which are found to be not
excessive and unreasonable and the excessive or unreasonable portion has to
be disallowed. It is well settled that the provisions of section. 40A(2)(a) of the
Act cannot have any application unless it is first concluded that the expenditure
5 ITA No.4631/Del./2011
was excessive or unreasonable, as held in the case of Upper India Steel
Manufacturing And Engineering Co. Private Limited, 117 ITR 569(SC). In the
instant case, there is nothing to suggest that the AO found the payment of
remuneration to director excessive having regard to either (a) fair market value
of the services or facilities; or (b) the legitimate needs of the business of the
assessee; or (c) the benefits derived by or accruing to the assessee on receipt of
such services or facilities. The AO while making the disallowance observed that
disallowance was made keeping in view quantum and nature of business of the
assessee. But how quantum or nature of business affected payment of salary to
its director, has not been elaborated. No businessman can be compelled to
maximize his profit. The income-tax authorities must put themselves in the shoes
of the assessee and see how a prudent businessman would act. The authorities
must not look at the matter from their own view point but that of a prudent
businessman. Not a whisper has been made by the AO in respect of any of
these three ingredients in his assessment order. There is nothing to suggest
that the AO ever brought any material on record on this aspect before
concluding that remuneration @ `3 lacs pm was excessive or unreasonable nor
even cited any comparable instances in respect of the fair market value of the
services rendered by the director.
6.2 Now we may have a look at the decision in Eastern Condiments (P)
Ltd(supra) relied upon by the ld. DR. In the said case, the assessee-company
was engaged in the manufacture and export of spices. Export was done by a
proprietorship concern of the managing director of the assessee-company.
Though normal commission paid by the assessee for marketing its products was
at 5 per cent, for the sales effected to the proprietorship concern of the
managing director, the assessee paid commission at 10 per cent and claimed the
same as deduction on the ground that additional commission was attributable to
the packing cost incurred by the managing director. The AO noticed that the
managing director had purchased machinery for packing in December, 2000
whereas exports were made by him from April, 2000 onwards. He further noted
6 ITA No.4631/Del./2011
that goods, while in transit from the assessee to the managing director,
straightway went to the export stream. Therefore, he disallowed additional 5 per
cent commission paid to the managing director which was confirmed by the
Commissioner (Appeals). On second appeal, the Tribunal, however, allowed the
claim of the assessee. On further appeal, the Hon'ble High Court found that the
Tribunal had not cared to consider any of the findings of the AO and had
assumed the claim of the assessee that the additional discount was attributable
to the packing cost incurred by the managing director, as true. In order to prove
that the managing director was left with packing for export and sale of the
commodity locally, it was for the assessee to prove that sales were in bulk
quantity and the managing director was engaged in the packing. The finding of
the AO was that the managing director had purchased certain machinery only in
December, 2000 whereas goods purchased from the assessee were from April,
2000 onwards. It was the further finding of the AO that the goods, while in transit
from the assessee to the managing director, straightway went to the export
stream which was impossible unless the goods were in packed condition., nor
was there any finding by the Tribunal that the managing director had maintained
even a single facility for packing. In the light of these observations, the Hon'ble
High Court remanded the matter to the AO for giving an opportunity to the
assessee as well as to the managing director to prove that packing was done by
the managing director to justify additional discount granted and if the assessee
failed to do so, disallowance could be made in the assessment. Now how this
decision helps the Revenue ,has not been explained by the ld. DR.A mere glance
at this decision reveals that facts and circumstances in the said decision are
altogether different from the facts and circumstances of the case, especially
when the AO nowhere established that the remuneration to director was
excessive having regard to either (a) fair market value of the services or
facilities; or (b) the legitimate needs of the business of the assessee; or (c) the
benefits derived by or accruing to the assessee on receipt of such services or
facilities. Thus, reliance on the aforesaid decision is misplaced.
7 ITA No.4631/Del./2011
6.3 In view the foregoing, especially when there is no material on record to
hold that payment of remuneration @ `3 lacs pm to the director was excessive or
unreasonable, we have no hesitation in upholding the findings of the ld. CIT(A).
Therefore, ground no. 1 in the appeal of the Revenue is dismissed.
7. No additional ground having been raised before us in terms of
residuary ground no. 2 in the appeal, accordingly, this ground is dismissed.
8. No other plea or argument was made before us.
9. In the result, appeal is dismissed.
Order pronounced in open Court
Sd/- Sd/-
(G.C. GUPTA) (A.N. PAHUJA)
VICE PRESIDENT ACCOUNTANT MEMBER
NS
Copy of the Order forwarded to:-
1. Assessee
2. DCIT,Circle-9(1),Room no.163, C.R. Building, New Delhi
3. CIT concerned
4. CIT(Appeals)-XII, New Delhi
5. DR, ITAT,'G' Bench, New Delhi
6. Guard File.
By Order,
Deputy/Asstt.Registrar
ITAT, Delhi
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