Commissioner Of Income Tax-I, Ludhiana v. M/S Kudu Industries, Ludhiana

IN THE HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH ITA No.382 of 2014 (O&M)Date of decision:03.03.2015 Commissioner of Income Tax-I, Ludhiana) ....Appellant Versus M/s Kudu Industries, Ludhiana ...... Responden CORAM:HON'BLE MR.JUSTICE S.J.VAZIFDAR, ACTING CHIEF JUSTICEHON'BLE MR.JUSTICE G.S.SANDHAWALIA Present:Mr.Rajesh Katoch, Advocate, for the appellant, G.S.Sandhawalia J. **** CM No .24208CII of 2014 Application for condonation of delay of 69 days in filing the appeal,is allowed, in view of the averments made in the application, which are dulysupported by an affidavit of the Commissioner of Income Tax-I, Ludhiana (forShort, the 'CIT"). CM No 24209CII of 2014 Application for exemption to file true copies of the assessment orderdated 16.12.2011 (Annexure A-I), CIT(A)'s order dated 06.09.2012 (AnnexureA-II) and ITAT's order dated 23.12.2013 (Annexure A-III), is allowed, in view ofthe averments made in the application, which are duly supported by an affidavitof the CIT. ITA No.382 of 2014 The present appeal, preferred by the Revenue, has been filed undersection 260A of the Income Tax Act, 1961 (for short, the 'Act'), against the orderdated 23.12.2013 (Annexure A-IIl), passed by the Income Tax AppellateSAILESH RANJAN2015.03.23 10:43dorabunal, Chandigarh Bench ‘B' Chandigarh (for short, the ‘Tribunal') in ITI attest to the accuracy andintegrity of this document No.1252/Chd./2012, for the assessment year 2009-10. The Revenue has claimed the following questions of law fordetermination by this Court: “(a) Whether on the facts and in the circumstances of the case andin law, the Hon'ble ITAT was correct in deleting the disallowance u/s40A(2)(b) made by the Assessing Officer after examining theunreasonableness of the huge salary paid to Mr. R.S.Saluja vis-a-vis the profits & turnover of the firm as well as average salary beingpaid to the management personnel by its group company, i.e. SELManufacturing Ltd. which has more than 13 times the turnover thanthe assessee firm. (6) Whether on the facts and in the circumstances of the cases andin law, the Hon'ble ITAT was correct in deleting the disallowance u/s40A(2)(b) made by the Assessing Officer, ignoring the fact that theprofits of the firm and the individual for the Asstt. Year 2009-10 arenot taxable at the same rate, as the profits of the firm for Asstt. Year2009-10 are taxable at the flat rate of 30.90% and the individualassessee has the benefit of tax slabs? ” The Joint Commissioner of Income Tax (OSD) Circle-I, Ludhiana,being the Assessing Officer (for short, the 'AO'), vide order dated 16.12.2011(Annexure A-I), noticed that the respondent-assessee/firm had paid an amount of=24 lacs to Shri R.S.Saluja, who is father of one of the partners and a personcovered under Section 40A(2)(b) of the Act. Accordingly, justification wassought as to why the salary should not be treated as excessive and the reply of theassessee was rejected wherein the background of the person was explained as tohow he could contribute towards the direction in which the company could betaken. The fact that the turn-over of M/s SEL Manutacturing Company Ltd. was4590 crores while that of the assessee/firm was L48 crores, weighed with the AOwhereby it came to the conclusion that the monthly taxable profits were 41.47lacs while the salary paid to the said person was42 lacs, which was more than thetotal profits of the firm, per month. Accordingly, the AO came to the conclusionSAILESH RANJAN2015.03.23 10:43I attest to the accuracy andintegrity of this documentfratacsatary ofL50,000/- per month would be reasonable and the excess amount of salary, amounting to L18 lacs was disallowed under Section 40A(2) and addedback to the income of the assessee. of salary, amounting to L18 lacs was disallowed under Section 40A(2) and addedback to the income of the assessee. The CIT, vide order dated 06.09.2012 (Annexure A-IJ), rejected thecontention of the Revenue and allowed the appeal by holding that the AO couldnot substitute the wisdom of the partners of the firm to hold that the salary wasexcessive and unreasonable. Accordingly, the disallowance made by the AO wasdirected to be deleted by noticing that both the assessee/firm as well as ShriR.S.Saluja were on the same tax bracket and his experience would take theassessee/firm to greater heights and the appeal was partly allowed. The Revenue filed an appeal against the said order of the CIT beforethe Tribunal, which came to the conclusion that the Revenue had failed to pointout any motive of tax planning or tax advantage under the Act and what had to beseen is whether the said expenses were excessive or unreasonable with regard tothe services or facilities being provided. It was, accordingly, held that exceptdoubting the genuineness of the said expenditure, there was no other finding thatthe expenditure was excessive or unreasonable. Resultantly, the appeal of therevenue was dismissed, which led to the filing of the present appeal, challengingthe said findings recorded. Counsel for the Revenue has argued that the monthly profits of theassessee/firm was only|41.47 lacs while the salary of Shri R.S.Saluja was42 lacsand therefore, the question of law, framed above, arose as there wasunreasonableness of the huge salary paid and comparison could not be made toM/s SEL Manufacturing Company Ltd. The said submission, is without any basis. The assessee, in its reply,had given justification of the salary and given the following reasons for the highSalary being paid to Shri R.S.Saluja: “on. Ram saran saluja is aged about 68 years, wno promoted theR.S.Saluja Group in 1969. He holds a bachelors degree in artsfrom Punjab University. He is the main person behind theestablishment and growtn of the RS Saluja Group (Group) andaevelopment. He nas over 40 years of experience in the textileindustry. He has started with a modest business to manufacturehosiery products and knitted fabrics catering to the domesticmarket. Over the years he has evolved as an integrated textileplayer with presence in all the value aqded segments, from yarnmanufacturing, dyeing to manufacture of dyed knitted cloth andgarments. Kudu Industries is the flagship concern of R S SalujaGroup. Mr. R.S.Saluja looks after the complete function ofproduction planning of yarn and fabric dyeing and has been able toachieve the sale level of more than Rs. 48 Crores for the yearunder consideration. He provides strategic direction in selection oftechnology and machineries, in setting up of new manufacturingfacilities and improvement of production processes, exploring anddiversifying into new ventures. The group turnover is more than1000 crores as on date. Keeping in view, his services andexperience, contribution etc. the payment account of salary madeto nim quite reasonable. The justification, thus, would go on to show that the said person issuccessfully running the business of the group which had a return of more thanthousand crores, on account of his experience. The main company he hadestablished way back in 1969 and due to his experience of over four decades, hehad also been able to help the respondent/assessee concern to achieve the salelevel of|=48 crores. Merely because the company was, at present, earning lowmonthly taxable profits, would not be a ground, as such, to disallow the salary tothe tune ot 42 lacs per month, which Shri R.S.Saluja was being paid, keeping inview his background, experience and therefore, it cannot be said that he was aman of straw. The CIT and the Tribunal both have recorded a finding that it isnot that the said person was taxed at a lower rate than that of the assessee-firmand therefore, they had correctly held that the AO could not substitute theSAILESH RANJAN2015.03.23 10:43I attest to the accuracy andwisdom of the partners of the firm to hold that the salary was excessive andintegrity of this document unreasonable. The findings which have been recorded are purely on facts arisingout of the peculiar circumstances of the case and no question of law, as such,arises out of the facts of the case which would require adjudication as has beensought to be contended. Accordingly, finding no merit in the present appeal, the same is dismissed. (S.J.Vazifdar)(G.S.Sandhawalia)Acting Chief JusticeJudge03.03.20158)/.68,