Commissioner Of Income Tax, Jaipur-Ii, Jaipur v. M/S Swapan Sakar Insurance Consultant & Marketing Services (P) Ltd. C-26, 3[Rd] Floor, Lal Kothi, Jaipur

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 609 / 2011 Commissioner of Income Tax, Jaipur-II, Jaipur ----Appellant Versus M/S Swapan Sakar Insurance Consultant & Marketing Services (P) Ltd. C-26, 3[rd] Floor, Lal Kothi, Jaipur ----Respondent _____________________________________________________ For Appellant(s) : Mr. R.B. MathurFor Respondent(s) : Mr. Siddarth Ranka _____________________________________________________ HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGH Judgment 01/08/2017 1.By way of this appeal, the appellant has assailed thejudgment and order of the Tribunal whereby the Tribunal haspartly allowed the appeal of the assessee and modifying the orderof AO as well as CIT(A). 2.This Court while admitting the matter framed the followingquestions of law:- “Whether in the facts and circumstances of thecase, the ITAT was justified in allowing the paymentof commission/incentives to the Directors of theCompany as business eligible u/s 40A(2)(b) of theAct despite of the fact that the said Director was nothaving basic knowledge of the function of companyand their duties?” 3.Mr. Mathur has taken us to the order of CIT(A) in para 1.3 wherein it has been observed as under:- Judgment 01/08/2017 1.By way of this appeal, the appellant has assailed thejudgment and order of the Tribunal whereby the Tribunal haspartly allowed the appeal of the assessee and modifying the orderof AO as well as CIT(A). 2.This Court while admitting the matter framed the followingquestions of law:- “Whether in the facts and circumstances of thecase, the ITAT was justified in allowing the paymentof commission/incentives to the Directors of theCompany as business eligible u/s 40A(2)(b) of theAct despite of the fact that the said Director was nothaving basic knowledge of the function of companyand their duties?” 3.Mr. Mathur has taken us to the order of CIT(A) in para 1.3 wherein it has been observed as under:- “1.3. I have considered facts of the case andarguments taken by Sh.Dani quite carefully. Aftergoingthroughtheschemeofsuchcommission/incentive payment under which paymentof commission has been made to Smt. Sapna Jaindirector and Sh. Shyam Sundar Sharma brother of thedirector who are considered as related persons withinthe meaning of S.40(2)(b) of I.T. Act it is clear thatthere is no commensurate efforts/services made bythese persons in bringing Rs. 2500 as registrationcharges payment by subsequent members of thechain. U/s 40A(2)(a) when the assessee incurs anyexpenditure in respect of which payment has beenmade or is to be made to such related persons andthe AO is of the opinion that such expenditure isexcessive or unreasonable having regard to fairmarket value of the goods, services or facilities forwhich the payment is made or the legitimate needs ofthe business then so much of the expenditure asconsidered by AO to be excessive or unreasonablecannot be allowed as a deduction. As per thisprovision when an opportunity was given it wasrequired to be proved that such payment made tothese related persons is not excessive or is notunreasonable having regard to the services receivedby the appellant company. After going through thequestions and answer as reproduced by the assessingofficer in the body of assessment order from thestatement of Smt. Sapna Jain and Sh. Shyam SundarSharma it is clear that certainly the services/benefitsin commensuration of such payment made has notbeen obtained by the appellant company. Smt. SapnaJain was not knowing anything regarding nature ofregistration expenses received from a new memberwhen nothing is paid to such immediate new member.She was not knowing even the number of goodperformer in the company work though she was thedirector. She even did not remember that how muchcommission was paid to her and what was the basis ofpayment of commission made. Surprisingly, when aspecific question was asked that what services arebeing rendered by her in the company or in otherwords what were the nature of her duties then shereplied that she attended the duties of general natureand remaining she do not remember. Similarly, whenthe statement of Sh. Shyam Sundar Sharma who wasthe brother of Director Sh. Deepak Sharma wasrecorded he was not having detailed knowledge of theaffairs of the company though he has stated that hewas working as a network manager and his jobresponsibilities includes managing multi levelmarketing division of the company. On factualanalysis it is seen that absolutely and certainly thesepersons were doing nothing in order to bring Rs. 2,500/- as registration fee from a new member out ofwhich they were receiving their cut ascommission/incentive. The basic requirement to allowany expenditure/deduction particularly within themeaning of S.40A(2)(b) of the I.T. Act is that thecompany should must receive equivalent amount ofservice/benefit from the person to whom suchpayment has been made by appellant company whichis claimed as a deduction. What to talk of equivalentamount of service/benefit from these related personsbut virtually nothing has been done by these personsin bringing Rs. 2500/- as registration charges fromnew members added out of which as per carefullydrafted scheme of incentive/commission they havepocketed the funds of the company. Under thesecircumstances in my considered view the assessingofficer was justified and liberal even in allowing Rs.9.5 lacs as commission/incentive to these two personsas reasonable and not excessive. With the discussionthe said disallowance of commission/incentive tothese related persons of an amount of Rs.1,23,42,430/- is hereby confirmed by rejectingrelevant ground of appeal.” 4.He contended that both the Directors were not qualifiedand one of the Director lady was not knowing how to run thebusiness. 5.Counsel for the appellant has relied upon the decision inthe case of Commissioner of Income Tax vs. Paarel Imports andExports (P) Ltd. reported in [2008] 218 CTR (Ker) 685 wherein ithas been held as under:- “6. Section 40A (2)(a) and (2)(b) is in the followingterms: 40A(2)(a) : Where the assessee incurs anyexpenditure in respect of which payment has beenor is to be made to any person referred to in Clause(b) of this sub-section, and the AO is of opinion thatsuch expenditure is excessive or unreasonablehaving regard to the fair market value of the goods,services or facilities for which the payment is madeor the legitimate needs of the business orprofession of the assessee or the benefit derived byor accruing to him therefrom, so much of theexpenditure as is so considered by him to be excessive or unreasonable shall not be allowed as adeduction. (b) The persons referred to in Clause (a) are thefollowing,namely: (i)... (ii) Where the assessee is a company, firm, association ofpersons or Hindu Undivided family,…..any director of thecompany, partner or the firm, or member of the associationor family, or any relative of such direc tor partner or member;& (iii)&(iv)…….... (v) a company, firm, AOP or HUF or which adirector, partner or member, as the case may be,has a substantial interest in the business orprofession of the assessee; or any director, partneror member of such company, firm, association orfamily or any relative of such director, partner or member; excessive or unreasonable shall not be allowed as adeduction. (b) The persons referred to in Clause (a) are thefollowing,namely: (i)... (ii) Where the assessee is a company, firm, association ofpersons or Hindu Undivided family,…..any director of thecompany, partner or the firm, or member of the associationor family, or any relative of such direc tor partner or member;& (iii)&(iv)…….... (v) a company, firm, AOP or HUF or which adirector, partner or member, as the case may be,has a substantial interest in the business orprofession of the assessee; or any director, partneror member of such company, firm, association orfamily or any relative of such director, partner or member; Therefore, the AO is obliged to consider whether thepayments made to persons made mention in Clause(b) towards service charges are for the legitimateneeds of the business or profession of the assessee.Herein, the facts show that the company consists offour shareholders, viz. (1) Mr. Thomas Elias Parrel,(2) Mrs. Ponnamma Elias, (3) Mr. Kuriakose EliasPaarel and (4) Mrs. Roshini Punnoose. Themanaging director is sl. No. 1 and sl. Nos. 3 and 4were directors. The names of the partners showthat they are the managing director of the company,another director of the company, brother of themanaging director who is an employee of thecompany and father of the managing director. Themanaging director had received salary andcommission amounting to Rs. 1,21,730, ShriKuriakose Elias Paarel, who is a director, hadreceived remuneration and commission of Rs.1,60,730, Shri Punnoose Elias Paarel who is thebrother of the managing director and employee ofthe company, has been paid salary of Rs. 71,090and commission of Rs. 12,331 by the companyduring the relevant period. During the periodrelevant for the asst. yr. 1991-92, the assessee hadnot incurred any expenditure on account of servicecharges. During the year ended on 31st March,1991 the total sales stood at Rs. 2,57,72,289,whereas for the year which ended on 31st March,1992 the total sales stood at Rs. 3,24,60,746. Itwas noticed by the AO that during the year 1992-93 the percentage of discount was 3.81 percent,whereas during the year which ended on 31stMarch, 1991 the percentage of discount was 1.88per cent and therefore the increase in the overallsales is only due to the increase in the amount ofdiscount. In fact, the above finding rendered by theAO is based on the correct appreciation of theactual factual position. The increase in salesturnover is not due to any extra effort done by theconsultingfirm. firm. In fact, the managing director and other directorshave received remuneration from the company andthey have rendered services in generaladministration, marketing, etc., to the company. Forthe very same functions service charges have beenpaid to the firm M/s Team Paarel. It really showsthat the persons concerned are the same and theremuneration actually received from the companyreflects the service rendered by them to thecompany and it is not due to any extra servicerendered by them as partners of M/s Team Paarel. 7. The assessee has got a case that a charteredaccountant, viz., Mr. Stanly Kunjipalu was retainedby M/s Team Paarel for giving advice on financialand accounts matters and he was also givingservices on management and information system tothe company and whose charges were paid by M/sTeam Paarel, The AO found that this claim is notcorrect. The letter dt. 1st Nov., 1993 by whichdetails are furnished by the assessee shows that thesaid chartered accountant had received professionalcharges from the company which have beenremitted by the company in its accounts. Thecompany had also paid charges to advocate,chartered engineer, etc. Therefore, the servicecharges have already been met by the companywhich are reflected in their accounts wherein thefirm Team Paarel does not come into the picture atall. 8. Thus, it is a case where the real nature of thepayment shows that the very same persons who aremanaging the company, have been shown as inreceipt of remuneration being the partners of thefirm. While considering this question, the dictumlaid down in McDowell & Co. Ltd. (supra) is relevant.Chinnappa Reddy, J. in the concurring judgment,reiterated that 'in our view, the proper way toconstrue a taxing statute, while considering adevice to avoid tax, is not to ask whether theprovisions should be construed literally or liberally,nor whether the transaction is not unreal and not prohibited by the statute, but whether thetransaction is a device to avoid tax and whether thetransaction is such that the judicial process mayaccord its approval to it'. In the light of the abovedictum, we are of the view that the transactionherein is clearly a device to avoid tax and the sameisnotconvincing. 9. The CIT(A) reversed the order passed by the AOonly on the ground that to have the application ofSection 40A(2)(b) of the Act, it should have beenestablished that the fair market value of services forwhich the payment is made Is less than the amountpaid by the assessee. The real issue was not at allconsidered by the CIT(A). The approach made istotally erroneous. The Tribunal after noticing thatthe managing director or some of the directors ofthe assessee-company are related to the partners ofthe firm, referred to the claim of the assessee thatspecialised services rendered by them are thosewhich the assesses company could not do and theyhelped to increase the export market. The Tribunalassumed that they also introduced some innovationin the working of the company to boost productionand it was presumed that the payment of servicecharges paid by the assessee was not (for) businessexpediency and hence an allowable deduction. Weare of the view that none of the aspects relevanthave been considered by the Tribunal and theimport of Section 40A(2)(b) has not been discussed.The fact that there was no business increaseactually, because of the services rendered by them,was also not considered and the fact that thecompany has been paying salary and commission tothem for some service was also not considered, Theapproach made is totally perverse and there is norationale in it.” 6.He has also relied upon the decision of Punjab and HaryanaHigh Court in the case of Romesh Kumar vs. CIT wherein it hasbeen held as under:- “14. It was on the basis of these observations thatthe assessing officer had disallowed thecommission claimed in both the assessment yearsholding that the commission had been paid onnon-business grounds and was a device to reducethe assessees taxable income. The Commissioner(Appeals) had also turned down the pleas put forthby the assessee that payment of commission to Anil Kumar Gupta was a compulsion to retain hisservices for improvement of the business. TheCommissioner (Appeals) had come to a findingthat the assessee had failed to prove that AnilKumar Gupta had contributed anything towardsthe improvement of the business to justifypayment of huge commission to him. When theentire matter was re-agitated before the Tribunal,its observations and findings were no differentthan the ones given by the assessing officer andaffirmed by the Commissioner (Appeals) on thiscount. The Tribunal had come to a definite findingthat it was not on account of being a nephew ofthe assessee that he was paid such hugecommission. It is also clear that it was well withinthe recognizance of the Tribunal that a nephewwas not included in the term relative as persection 2(41) of the Act. This aspect is not at allconcerned with regard to rejection of plea of theassessee and with making of addition in hisincome. It was on entirely different grounds. 17. Contention of learned counsel for the assesseeis that the Court is concerned with actual actiontaken by the assessee and not the action whichthe assessee should have taken under thecircumstances. It is further urged that it is notpermissible in law to bring in suppositions andthen to find out whether the claim is allowable ornot? Support has been sought from CIT v. OmParkash Behl MANU/PH/0196/1979 : (1981) 132ITR 342 (Punj. & Har.) and Smt. Radha DeviMohatta v. CIT MANU/MH/0094/1980 : (1981) 129ITR229(Bom.).18. There is no dispute about the law and therecannot be any. Facts of the case in hand, however,are entirely different. When these facts areappreciated in the context as also in thecircumstances in which the commission was paid,no support from these judgments is available tothe assessee. All the three revenue authorities onfacts had come to one and the same conclusionand there is concurrent finding that payment ofcommission shown in books of accounts of theassessee was merely a subterfuge to reduce thetax liability of the assessee. It is to be noticed thatthe Tribunal had re-assessed the entire issue andwithout being influenced by the earlier twoconcurring findings, had independently also cometo a finding that the claim on account ofcommission by the assessee was not tenable inthe assessment years under appeal and that it hadrightlybeenrejected.19. As the entire issue in these appeals concernsfacts and attending circumstances and there is nothing legal much less substantial to beadjudicated upon, no substantial question of law,in fact, arises for consideration in these appeals.The questions posed by the assessee thus neednot be answered as the same are based on facts.Consequently, both the appeals, being without anymerit, are dismissed.” 7.Counsel for the respondent Mr. Ranka contended that itwas uniform distribution while the person participated in thebusiness of the company proportionate business income waspaid to everyone. He has relied upon the decision of this Court inDBITA No. 301/2009 dated 10[th] February, 2014 wherein theDivision Bench of this Court in para 16 has observed as under:- “16.Certainly, aforesaid section provides thatthe AO, if he is of the opinion that such expenditureis excessive or unreasonable, having regard to thelegitimate business needs of the company and thebenefit derived by assessee, is not proper, has achance to disallow any amount over and abovewhich he feels appropriate but the opinion should beformed objectively from the point of view of aprudent businessman and after taking into accountthe statutory criteria and all relevant circumstancesand should not be influenced by immaterialconsiderations. Therefore, the AO, in our view, hasbeen influenced by extraneous considerations andhas not properly appreciated the involvement of ShriViswas Jain in leading a limited company of havingsubstantial increase in receipts and overall resultssince the limited company was formed. Not onlythat, we also notice that the assessee-company aswell as the salary paid to Shri Viswas Jain hasoffered to tax at maximum rate in his individualcapacity and therefore, it can be said that there ishardly any loss to the revenue in so far as thepayment of salary is concerned. We have observedthis only by way of an observation, otherwise, asobserved herein above, the reasonableness has tobe considered from the angle of a businessman andthe assessee, who happens to be a businessman,certainly did consider that salary of Rs.24 lac to ShriVisvas Jain was fair and reasonable and after gettingit approved, as observed herein above, in the extra-ordinary general meeting of the company.” 8.He has also relied upon the decision of Gujarat High Court in the case of Principal Commissioner of Income Tax-2 vs.Gujarat Gas Financial Services Ltd. reported [2015] 60 taxmann. Com 483 (Gujarat) wherein it has been held as under:- 8.He has also relied upon the decision of Gujarat High Court in the case of Principal Commissioner of Income Tax-2 vs.Gujarat Gas Financial Services Ltd. reported [2015] 60 taxmann. Com 483 (Gujarat) wherein it has been held as under:- “15. It is pertinent to note that so far as theCircular dated 6.7.1968 is concerned, it makesclear that the provisions under Section 40A(2)and particularly with regard to the transactionbetween the relatives and associates isconcerned, the same shall be treated as bonafidecase unless the officer finds it that one of them istrying to evade payment of tax.” 9.He has also relied upon the decision of Bombay High Court in case of Commissioner of Income Tax vs.V.S. Dempo & Co. (P)Ltd. reported in [2011] 336 ITR 209 (Bombay) and anotherdecision of Delhi High Court in case of Commissioner of IncomeTax vs. Dr. R.N. Goel reported in [2009] 177 Taxman 374(Delhi). 10.Taking into consideration the fact that there was uniformdistribution while the person participated in the business of thecompany proportionate business income was paid to everyone. 11.We are in complete agreement with the view taken by theTribunal. No case is made out for interference. 12.Hence, the issue is required to be answered in favour ofthe assessee against the department. 13. The appeal stands dismissed. (INDERJEET SINGH)J. (K.S.JHAVERI)J. A.Sharma/117