Ita/192/2013 Of The Commissioner Of Income-Tax v. M/S Fibres And Fabrics

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 6[TH|]DAY OF JANUARY 2071 PRESENT| THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE NATARAJ RANGASW AMY I1T.A. NO.192 OF 2013 BETWEEN: 1.|THE COMMISSIONER OF INCOME-TA® C.R.BUILDING QUEENS ROAD BANGALORE. 2.|THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE - 11 (3) RASHTROTHANA BHAVAN NRUPATHUNGA ROAD BANGALORE. .... APPELLANTS (BY MR.K.V.ARAVIND, ADVOCATE) AND" M/S FIBRES & FABRICS|INTERNATIONAL PVT. LTD.,NO.21, E-1, II PHASE, |PEENYA INDUSTRIAL AREA|BANGALORE - 560 O58. (BY MR.V.CHANDRASHEKAR ADV. FOR MR.M.LAVA, ADVOCATE) .., RESPONDENT THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX|ACT 1961, ARISING OUT OF ORDER DATED 30.11.2012 PASSEDIN ITA NO.1269/BANG/2010 FOR THE ASSESSMENT YEAR 2006-O07, PRAYING TO: (i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW,STATED THEREIN. | (ii) ALLOW THE APPEAL AND SET ASIDE THE ORDERS.PASSED BY THE ITAT, BANGALORE IN ITA NO.1269/BANG/2010—DATED 30.11.2012 CONFIRMING THE ORDER OF THE APPELLATE.COMMISSIONER AND CONFIRM THE ORDER PASSED BY THEDEPUTY.COMMISSINOER|OF.INCOME|TAX,|CIRCLE-11(3),BANGALORE. THIS ILT.A. COMING ON FOR’ HEARING, THIS DAY, | ALOK ARADHE J.,DELIVERED THE FOLLOWING: | JUDGMENT This appeal under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’, for short). has been filed by the revenue The subject matter of the|appeal pertains to the Assessment Year 2006-07. Theappeal was admitted by a Bench of this Court vide orderdated 03.07.2013 on the following substantial question|of law: “Whether the appellate authorities werecorrect in allowing remuneration paid tothe Managing Director nearly 90% of tnereturned income of the assessee companyignoring the applicability of Section 40A(2)and also ignoring the facts that the MD's physical presence was only 15 days in theyear and when the Managing Director wasnot awere of the existence and terminationof agreement in favour of SEL whereinnuge|paymentsweremadeby theassessee company under various headsand consequently recorded a_ perversefinding?” 2. Facts leading to filing of this appeal brieflystated are that the assessee is engaged in the businessof manufacture and export of readymade garments. The.assessee filed the return of Income for the Assessment|Year2006-07declaringtotalincomeof|Rs.9,03,/70,920/-. The return filed by the assessee wastaken up for scrutiny and a notice under Section 143(2).of the Act was issued on 02.11.2007. The Assessing.Officer by an order dated 08.12.2009 disallowed a sum.of Rs.8,14,25,233/- which was paid as remuneration tothe Director on the ground that there is no material to establish that the Director had rendered services to the|COM padNwarrantingpaymentofRs.8,14,25,233/- except being Managing Director. The Assessing Officer|disallowed the entire sum of Rs.8,14,25,233/- which was.paid to the Managing Director. The assessee thereupon|approached the Commissioner of Income Tax (Appeals)by filling an appeal who by an order dated 11.08.2010inter alia held that the Managing Director is directly|responsible for business of the company and he has got|sales from Italy and other European countries and.therefore, is entitled for remuneration. In the result, theaddition made by the Assessing Officer was disallowed|and the appeal preferred by the assessee was allowed.The revenue thereupon approached the Income TaxAppellate Tribunal (hereinafter referred to as ‘thetribunal for short). The tribunal Dy an order dated30.11.2012,upheldtheOrder|passedDYtneCommissioner of Income Tax (Appeals). In the aforesaidfactual background, the revenue Nas filed this appeal. 3.)Learned counsel for the revenue submittedthat the finding recorded by the Commissioner of 3.)Learned counsel for the revenue submittedthat the finding recorded by the Commissioner of Income Tax (Appeals) as well as the tribunal thatManaging Director of the assessee has solicited globalorders for the products of the assessee is based on.surmises and conjectures. Learned counsel for the|revenue has also invited our attention to the statement.of the Managing Director of the company, which was|recorded during post survey enquiry and has pointed out|that the answers given by the Managing Director clearly|establisn nis involvement in tne business and from|perusal of his statement, it is evident that he has.expressed his ignorance of any of the contracts signed|by the company and any payments made. It is also.Submitted that 90% of the returned income of the'assessee company was paid to the Managing Director asremuneration. It is furtner submitted tnat no material.was produced by the assessee that the Managing.Director had procured the orders globally for the|company. It is also contended that the _ tribunacommitted an error in_ shifting the burden on the Assessing Officer to establish the absence of Managing|Director from the work place and the burden is on theassessee to establish that the expenditure in the form ofremuneration to the Managing Director was incurred for|the purpose of business and the same was proportionateto the services rendered to the assessee. It Is also'pointed out that under Section 40A(2) of the ActeEmMmpOowtheAssessingOfficerCO disallowtheexpenditure / payment made to the related person i.e.,the payment made by a company in favour of a Directorif the expenditure is excessive and unreasonable. It isalso submitted that the aforesaid provision casts aburden on the assessee to establish that the paymentmade in favour of the Managing Director is neitherexcessive nor Unreasonable and tne penefit derived is'commensurate with the payment made to the ManagingDirector. In support of aforesaid submissions, relianceNas been placed on decision of the Supreme Court in.'GANAPATHY&CO.VS,COMMISSTONER|OF INCOME-TAX,BANGALORE’,TAXMANN.COM 194 (SC). (2016) 65 4On the other hand, learned counsel for theassessee submitted that the Assessing Officer disallowedthe amount paid to the Managing Director solely on the|ground that the Managing Director of the assessee stays|in India not for more than 14 to 15 days. It is furthersubmitted that the remuneration of the Managing.Director has been taxed in the hands of the Managing|Director under Section 143(3) of the Act and tax has.been deducted at source. It is submitted that the action|of the Assessing Officer in disallowing the paymentmade to the Managing Director amounts to doublededuction which is impermissible in law. It is also.contended that Managing Director of the assessee is responsible for sales and marketing of the companies|products and the remuneration which is paid to him.works out to 50% of tne total sales. It is furtner§SuDmitted thnat no disallowance is calledq for as tn amount in question has been taxed in the hands of theManaging Director and therefore, there is no loss ofrevenue to the exchequer. It is also submitted thatconcurrent findings of fact have been recorded in favour|of the assessee by the Commissioner of Income Tax.(Appeals) and the tribunal and therefore, no interferenceis called for in this appeal. In support of aforesaidsubmissions, reliance has been placed on decisions in.‘CIT VS. BILAHARI INVESTMENTS PVT LTD, 299ITR 1, ‘CIT VS. EXCEL INDUSTRIES LTD.', 358 ITR295, ‘CIT VS. DURGA PRASAD MORE’, (1971) 82.ITR 540 (SC), ‘SUDARSHAN SILKS & SAREES VS.CIT’, 300 ITR 205 SC, 'VIJAY KUMAR TALWAR VS.CIT,NE VDELHI,330[TR,SC/2010,‘K.RAVINDRANATH NAIR VS. CIT, 247 ITR 178(SC). 5.|We have considered the SUDMISSIONS made.by learned counsel for the parties and nave perused therecord. Before proceeding further, it is apposite to take. note of Section 37(1) and relevant extract of Section.40A(2)(a) of the Act, which is reproduced below for thefacility of reference: 5.|We have considered the SUDMISSIONS made.by learned counsel for the parties and nave perused therecord. Before proceeding further, it is apposite to take. note of Section 37(1) and relevant extract of Section.40A(2)(a) of the Act, which is reproduced below for thefacility of reference: 37. (1) Any expenditure (not being|expenditureofthenaturedescribedin sections 30 to 36 and not being in thenature of capital expenditure or personalexpenses of the assessee), laid out or.expended wholly and exclusively for the.purposes of the business or profession shallbe|allowedIn|computingtheincomeChargeable under the head “Profits and gains|of business or profession”.| 2) (a) Where the assessee incurs any|expenditure in respect of which payment has|been or to be made to any person refer- red.to in clause (b) of this sub-sections and the.Income-tax 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 ofthe business or profession of the assessee or. the benefit derived by or accruing to him|there from, so much of the expenditure as Is|so considered by him to be excessive or.Unreasonable shall not be allowed as aededuction: (b) The persons referred to in clause (a)are the following, namely:—_ (ii) where the assessee iS a company;|firm,association ofpersonsOrHinduundivided family any director of the|company, partner of the firm, or member of.the association or family, or any relative of.such director, partner or member; 6.|Thus,from.perusaloftheaforesaidprovisions, it is evident that the burden is on theassessee to establish that the amount was expendedwholly and exclusively for the purpose of business or.profession and Section 40A(2)(a) of the Act permits the.Assessing Officer to disallow the expenditure which is excessive or unreasonable. 7From perusal of the order passed by theAssessing Officer, it is evident that the Assessing Officerhas disallowed the payment made to the Managing|Director merely on the ground that total stay of the|Managing Director in India is for a period 14 to 15 days.The aforesaid finding has been set aside in appeal by the|Commissioner of Income Tax (Appeals) on the ground|that the Managing Director is directly responsible for thebusiness of the company an in fact, has Drougnt the sale.from Italy and other European countries and therefore,is entitled to remuneration. The aforesaid finding Nas|been|affirmedby|thetribunal.However, theCommissioner of Income Tax (Appeals) as well as thetribunal Nave completely failed to establish that no.material was produced by tne assessee to demonstratethat the Managing Director had secured the business of the company from Italy and other European countries.The provisions of Section 40A(2) which are applicable to.the fact situation of the case nave also not been taken| into account by the Commissioner of Income Tax.(Appeals) as well as the tribunal. In the facts andcircumstances of the case, we deem it appropriate toquash the order passed by the Commissioner of Income.Tax (Appeals) and the tribunal and remit the matter tothe Commissioner of Income Tax (Appeals) to decide theappeal afresh by taking into account the provisions of Section 40A(2) of the Act and the fact that the assesseenad failed to adduce any material to show tnat theDirector of the company had procured business for thecompany from Italy and other European countries.Accordingly, the substantial question of law is answered.| In the result, the appeal is disposed of. Sd/-JUDGE Sd/-—JUDGE