D.b. Income Tax Appeal v. M/S. Consulting Engineering Group Ltd

IN THE HIGH COURT OF JUDICATURE FOR RAJASTHANBENCH AT JAIPUR *** D.B. Income Tax Appeal No.301/2009Commissioner of Income Tax, Jaipur-II, JaipurVs. M/s. Consulting Engineering Group Ltd. DATE OF ORDER : 10/02/2014 PRESENTHON'BLE MR.JUSTICE AJAY RASTOGIHON'BLE MR.JUSTICE J.K. RANKA Mr. RB Mathur, Advocate, for the appellant.Mr. Mahendra Gargieya, Advocate with Ms. Manisha Surana, Advocate, for the respondent. BY THE COURT (Per Hon'ble Ranka, J.) 1.This appeal u/s 260-A of the Income Tax Act, 1961 (forshort, “IT Act”) has been preferred by the appellant-revenueagainst the order of the Income Tax Appellate Tribunal (forshort, “ITAT”) dt.17/10/2008 passed in ITA No.1058/JP/2007by which the ITAT has dismissed the appeal filed by theappellant-revenue against the order of the Commissioner ofIncome Tax (Appeals)-II, Jaipur (for short, the “CIT(A))”. Therelevant assessment year is the assessment year 2004-05. 2.The brief facts, as emerging on the face of record, arethat the respondent-assessee is a limited company andmainly engaged in the business of contract and working forNational Highway Authority of India on contract basis andthe respondent-assessee gets work order after submissionof tenders. It is claimed by the respondent-assessee that it is maintaining regular and proper books of accountssupported by material and relevant records and accountsare also audited by a Chartered Accountant. 3.The Assessing Officer (for short, “AO”), during thecourse of assessment proceedings, desired the respondent-assessee to explain the nature and source of paymentdebited on account of job work charges to the extent ofRs.2,51,80,655/- and particularly of three sub-contractorsnamely; Shri Bhura Ram Chaudhary, M/s. Payal Buildersand Consultants & Gautam Builders and Consultants towhom substantial payments amounting to Rs.24,49,757/-,27,92,267 and 16,47,516/- respectively have been made andfinding that the amount being substantial desired furtherparticulars and evidence with reference to the said paymentsto the said three sub-contractors. 4.The respondent-assessee had claimed an expenditureof Rs.50,18,663/- under the head of Soil testing andsurveying expenses and with reference to the same as well,further evidence was desired by the AO. There was a thirdclaim with reference to the remuneration/salary to one ShriViswas Jain who is Chairman-cum-Managing Director of therespondent-assessee-company to whom salary of Rs.24 lacwas paid and according to the AO, the payment isexcessive. 5.During the course of hearing, the AO desiredexplanation on all three points, referred to herein above. Inso far as the first issue is concerned, Shri Bhura RamChaudhary appeared before the AO and his statementswere recorded and he submitted that he does not maintainbooks of accounts but he has worked for the assessee-company and has filed return u/s 44 AF of the IT Act.However, the AO, in view of the statement recorded, was ofthe view that Shri Bhura Ram Chaudhary was not aware asto what amount he received from the assessee-company asalso the payments made by him to his labourers. Findingdiscrepancies, the AO was not satisfied with the explanationso offered. With reference to M/s. Payal Buidlers andConsultants, it has been observed by the AO that one Smt.Aruna Rajawat, who is the proprietress of the concern, onthe receipt of Rs.27,92,267/-, filed return only disclosing anincome of Rs.93,045/- and therefore, was not satisfied withthe explanation offered. With reference to Gautam Buildersand Consultants, it is observed that on the payment ofRs.16,47,516/- Shri Gautam Jain, Proprietor of M/s. GautamBuilders and Consultants, submitted a return u/s 44AD of theIT Act disclosing an income of Rs.1,60,010/- and afterholding that out of the three above sub-contractors, sincetwo have filed return of income on the presumptive basis u/s 44AD, they do not maintain regular books of accounts and the third one has paid tax of Rs.354/- only and accordinglydisallowed the amount of Rs.12,59,033/- at the rate of 5%out of the total job charges on an estimate/adhoc basis. 6.In so far as the Soil testing and surveying expenses,the AO simply held that the expenditure is disproportionatein proportion to the income received by way of Soil testingand surveying expenses and therefore, made an adhocaddition of 10% and disallowed the amount of Rs.5,01,866/-. 7.In so far as the salary paid to Shri Viswas Jain isconcerned, amount of Rs. 9 lac was disallowed on thepremise that the said amount is excessive consideringSec.40A(2)(a) of the IT Act as salary paid to Shri ViswasJain was Rs. 3 lac in the assessment year 2002-03 whichwas increased to Rs.12 lac in the assessment year 2003-04and abruptly increased by double to Rs.24 lac during theprevious year relevant to the year under appeal when theAO observed that there is no major change of duties andresponsibility. He further observed that one Alam Singh, whowas a technical person, being Engineer and Professor in thefield of Civil Engineering, was paid highest amount ofRs.2,40,000/- and therefore feeling that the salary paid isdisproportionate, held that the salary of Rs.15 lac wasreasonable and disallowed Rs.9 lacs. 8.Dissatisfied with the said disallowances, an appealcame to be preferred before the CIT(A). The respondent-assessee submitted a detailed explanation stating that theresults have been fair and reasonable and there was overallgrowth in the receipts and when receipts are substantiallybetter, the consequential expenditure had also to beincurred. It was contended that all the expenses paid to thesub-contractors are by account payee cheques and they arebeing assessed to IT Act and even tax deduction at sourcewas made from their respective payment as sub-contractorship and it is none of the duty of the respondent-assessee to find out whether they are filing returns underpresumptive scheme or otherwise. With reference to otherdisallowances also, the CIT(A), after considering thearguments advanced by the respondent-assessee, deletedthe dis allowances on all the three counts. 9.The revenue carried the matter in appeal before theITAT where also the ITAT, after considering the submissionmade by both the sides, upheld the deletion of thedisallowances and dismissed the appeal filed by therevenue. Hence this appeal. 10.Shri RB Mathur, ld. counsel for the appellant-revenuesubmitted that the AO had correctly disallowed all the threeexpenses out of the aforesaid expenses as the claim was abnormal and the respondent-assessee was unable to leadfurther evidence and to justify that the expenditures wereincurred to a large extent. He contended that merelybecause those sub-contractors are filing some return, thatdoes not mean that any amount of payment can be madeand allowed. He contended that it was the duty of therespondent-assessee to show the justification of payment ofhuge amounts to the respective sub-contractors whichranged from Rs. 16 lac to Rs.27 lac. He further contendedthat there was no justification for claiming abnormal amounton account of Soil testing and surveying expenses as alsoas to why the salary to the tune of Rs.24 lac was paid to ShriViswas Jain, who happens to be Chairman-cum-ManagingDirector of the respondent-company itself and therefore, hewas the sole person to take whatever the salary he wantedand this is not fair and proper. He contended that just inthree years, the salary has been increased from Rs. 3 lac toRs.24 lac and therefore, increase by 8 times was not proper.He contended that the AO had himself allowed an increaseof 5 times i.e. 15 lac and considered the same asreasonable and therefore, the salary over and above Rs.15lac was correctly disallowed. He contended that substantialquestion of law arises out of the order of the ITAT and needsconsideration by this Court. 11.Mr. Mahendra Gargieya, ld. counsel for therespondent-assessee, on the other hand, contended that it isbasically a finding of fact, not only by the ITAT but also theCIT(A), who, after appreciation of evidence and material onrecord, deleted the additions which had no basis. Hecontended that the estimated disallowances could not havebeen made without specific defects and when all roundperformance was better and when both the appellateauthorities have found, as a finding of fact, that the receiptshave sharply increased in comparison to the statedexpenditures, then no disallowance was required to be madeand fully supported the order of the ITAT and submitted thatno question of law arise out of the order of the ITAT. 12.We have considered the arguments advanced bycounsel for the parties and gone through the impugnedorders as well as the orders of the lower authorities. 13.In so far as the payments to sub-contractors areconcerned, it is noticed that all the payments are by accountpayee cheques and the work, which the respondent-assessee is doing, certainly required sub-contractorship tolook into various other jobs which possibly the respondent-assessee was unable to handle on its own. Admittedly, ShriBhura Ram Chaudhary appeared before the AO, acceptedthat he has worked for the respondent-assessee and had also received payments from the said concern. One may notremember after lapse of years as to exact amount havingbeen received from a particular concern and therefore, tosay that there was discrepancy in the statements of ShriBhura Ram Chaudhary is not proper. He had alreadyconveyed that he had filed his return u/s 44AF (should be44AD as he was not aware of the provisions of law) but didnot maintain the books of accounts which, in-fact, is notrequired to be maintained in a case of presumptive taxation.He has already conveyed that he had taken 25 people forworking for the respondent-assessee and used to take 10 to12 persons as and when required and that the tax was alsodeducted at source. In so far as the Payal Builders andConsultants & Gautam Builders & Consultants, both haveadmitted that they have received amount from therespondent-assessee for the work done by them and tax hasalso been deducted in their respective cases. It may be thatthese are small time persons and as required under the ITAct u/s 44AD, they were filing return and therefore, notrequired to maintain regular and proper books of accountsand if adverse inference is drawn by the AO on account ofthis fact, in our view, is not proper. It is also an admitted fact,as observed by the CIT(A) as well as the ITAT that incomefrom DPR work had increased by 21.35% over preceding year whereas the corresponding expenditure is only 17.19%.We also observe that while the payment to the three sub-contractors totaled Rs.60,09,550/- whereas the AO, for noreason, disallowed 5% out of the total job work charges paidamounting to Rs.2,51,80,655/- and this exercise of the AOappears without any justification and was not proper. Whenall the three recipients did claim that they have received theamount for the work done on behalf of the respondent-assessee, then by and large there was no occasion for theAO to disallow the same and if or any reason the AO wasnot satisfied with reference to the income shown by therecipients in their respective hands, adverse inference atleast could not have been made in the hands of theassessee and if at all then, the AO, assessing the assesseeought to have forwarded such information to the AO,assessing those recipients and action, if deemed proper,could have been taken in their respective hands rather thanobserving here in the case of the respondent-assessee thatthe sub-contractors have not shown proper income or theincome is disproportionate to the receipts. Therefore, we feelthat such an observation and ultimate conclusion by the AOto disallow the adhoc amount was not correct and rightlyaccepted by both the appellate authorities. 14.In so far as the disallowance out of the Soil testing and surveying expenses is concerned, both the ITAT as well asCIT(A) have correctly disallowed the deletion and there wasno occasion for any adhoc disallowance out of the saidexpenditure at the rate of 10%. The CIT(A) so also the ITAThad considered the matter after analyzing the detailssubmitted before them and it has been observed by the CIT(A) and approved by the ITAT that the receipts by theassessee were to the extent of Rs.85,75,162/- as against theexpenditure of Rs.50,18,663/-. Therefore, even the receiptsare substantially higher than the expenditure and in our view,the disallowance deleted by the CIT(A) and approved by theITAT cannot be faulted with. 15.In so far as the salary/remuneration to the Chairman-cum-Managing Director Shri Viswas Jain to the extent ofRs.24 lac is concerned, in our view, it is for an assessee, abusinessman, who happens to be well versed in runningbusiness/profession to come to a conclusion as to whatremuneration/salary is to be paid to an employee and in ourview, reasonableness is to be judged from the angle of abusinessman rather than from the angle of the AO who maynot be aware of the realities and peculiarities of business. Ithas already been explained on the assessment records thatthe reasonableness or the justification of paying salary to thetune of Rs.24 lac to Shri Viswas Jain was highest as he was 15.In so far as the salary/remuneration to the Chairman-cum-Managing Director Shri Viswas Jain to the extent ofRs.24 lac is concerned, in our view, it is for an assessee, abusinessman, who happens to be well versed in runningbusiness/profession to come to a conclusion as to whatremuneration/salary is to be paid to an employee and in ourview, reasonableness is to be judged from the angle of abusinessman rather than from the angle of the AO who maynot be aware of the realities and peculiarities of business. Ithas already been explained on the assessment records thatthe reasonableness or the justification of paying salary to thetune of Rs.24 lac to Shri Viswas Jain was highest as he was the sole person who was influential in getting business forthe assessee-company. It is already observed in theassessment record that the receipts of the assessee hadincreased from 7.73 crores in the assessment year 2003-04to 9.92 crores during the previous year relevant to the yearunder appeal due to competence of Shri Viswas Jainwhereas the salary has been increased from 12 lac to 24 lacduring the previous year under appeal. Not only this, it is acase of a limited company and the saidremuneration/increase in the remuneration was approvedafter passing a proper resolution in an extra-ordinary generalmeeting of the shareholders u/s 269 of the Companies Act.The minutes of the said meeting where all the directors werepresent had also been produced before the lowerauthorities. It is already on record that it was on account ofShri Viswas Jain who happens to be the key person of theCompany and whole time Director and who had convertedhis proprietorship concern into a limited company from theassessment year 2003 and when he has been proved to bean asset for the company, in our view, the CIT(A) rightlydeleted the said disallowance which was upheld by the ITATand we also see no reason in interfering with the same. Inour view, on the face of overwhelming evidence on record,salary of Rs.24 lac cannot be said to be excessive or unreasonable and the revenue has not been able to makeout as to whether the salary paid to Shri Viswas Jain was notas per the fair market value as provided u/s 40A(2)(a) and40A(2)(b) of the IT Act. 16.Certainly, aforesaid section provides that the AO, if heis of the opinion that such expenditure is excessive orunreasonable, having regard to the legitimate businessneeds of the company and the benefit derived by assessee,is not proper, has a chance to disallow any amount over andabove which he feels appropriate but the opinion should beformed objectively from the point of view of a prudentbusinessman and after taking into account the statutorycriteria and all relevant circumstances and should not beinfluenced by immaterial considerations. Therefore, the AO,in our view, has been influenced by extraneousconsiderations and has not properly appreciated theinvolvement of Shri Viswas Jain in leading a limited companyof having substantial increase in receipts and overall resultssince the limited company was formed. Not only that, wealso notice that the assessee-company as well as the salarypaid to Shri Viswas Jain has offered to tax at maximum ratein his individual capacity and therefore, it can be said thatthere is hardly any loss to the revenue in so far as thepayment of salary is concerned. We have observed this only by way of an observation, otherwise, as observed hereinabove, the reasonableness has to be considered from theangle of a businessman and the assessee, who happens tobe a businessman, certainly did consider that salary of Rs.24lac to Shri Visvas Jain was fair and reasonable and aftergetting it approved, as observed herein above, in the extra-ordinary general meeting of the company. 17.In view of what we have discussed herein above, on all by way of an observation, otherwise, as observed hereinabove, the reasonableness has to be considered from theangle of a businessman and the assessee, who happens tobe a businessman, certainly did consider that salary of Rs.24lac to Shri Visvas Jain was fair and reasonable and aftergetting it approved, as observed herein above, in the extra-ordinary general meeting of the company. 17.In view of what we have discussed herein above, on all the three issues, the ITAT, after appreciation of evidence,has come to the conclusion that the disallowance out of jobwork charges, soil testing and surveying charges anddirectors' remuneration is not proper and it had been rightlydeleted by the CIT(A) and we do not find any infirmity orperversity in the said order of the ITAT. It is purely a findingof fact and no question of law much less substantial questionof law can be said to emerge out of the said order of theITAT so as to call for any interference of this Court. In ourview, no substantial question of law arises out of the orderpassed by the ITAT. 18.Consequently, the appeal, being devoid of merit, ishereby dismissed in limine. No order as to costs. [J.K. RANKA],J. ,J.Raghu/p.13/Certificate:All corrections made in the judgment/order have beenincorporated in the judgment/order being e-mailed./Raghu, Sr.PA.