Ita/244/2010 Of Commissioner Of Income Tax v. M/S Swadeshi Internationals

IN THE HIGH COURT OF KARNATAKA AT BENGALURU|ON THE 11 DAY OF DECEMBER, 2018. BEFORE THE HON BLE MR. JUSTICE RAVI MALIMATH| AND| THE HON'BLE MR. JUSTICE K. NATARAJAN) INCOME TAX APPEAL NO.244 OF JZOL BEI|WEE 1COMMISSIONER OF INCOME TAX MANGALURU., 2 |ASSISTANT COMMISSIONER OF INCOME TAX. CIRCLE-10(1), BENGALURU. ... APPELLANTS (BY SRI JEEVAN J. NEERALGI, ADVOCATE) ANI M/S. SWADESHI INTERNATIONALSNO.731, INDUSTRIAL LAYOUT,HOSUR MAIN ROAD. ~., RESPONDENT (BY SRI A. SHANKAR, SENIOR COUNSEL, ALONG WITH SRI M. LAVA, ADVOCATE) KOK OK THISINCOME|TAX.APPEAL|ISFILED|UNDERSECTION 260A OF THE INCOME TAX ACT, 1961, PRAYINGTO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW|AS STATED THEREIN AND TO ALLOW THE APPEAL BYSETTING ASIDE THE ORDER OF THE TRIBUNAL IN I.7T.A.NO. 703/BANG/2009AND|CROSS.OBJECTIONNO.47/BANG/2009|AND|TO.PASSCONSEQUENTIALORDERS, IN THE INTEREST OF JUSTICE AND EQUITY. THIS INCOME TJTAXK APPEAL COMING ON FHEARING THIS DAY, RAVI MALIMATH, J., DELIVERED THE.FOLLOWING: JUDGMENT TheaSSeSSCeIsaTrustdoingbusinessofmanufacture and export of garments. For the Assessment|Year 2005-06, it filed a return of income disclosing the)income of Rs.78,/74,869/-. The return was processed|under Section 143(1) of the Income Tax Act, 1961, (for|short, ‘the Act’). The assessee’s case was selected for|scrutiny and notice under Section 143(2), was issued. In|response, the assessee appeared. The books of accounts|were produced. It was noticed that the assessee has)debited a sum Rs.1,69,78,000/- towards remuneration|paid to the trustees, namely, Sri Sunit Gupta and | Smt. Simi Gupta. Unsigned true copies of the resolutions|passed on 20-8-2004 authorising the said payment was|furnished during the proceedings. The resolutions:indicated that Sri Sunit Gupta is provided with afremuneration/compensation of Rs.1,01,86,800/- for the!services rendered to the Trust in pursuance to Clause 6(Ss)of the indenture of Trust. Similarly, Smt. Simi Gupta is |provided with remuneration of Rs.67,92,100/- for the very|Same purpose. In view of the fact that one of the trusteesnad not signed to the resolution to the extract given to tneOfficer, the resolution was not accepted as a valid!resolution. That in the earlier years, no remuneration was|provided. Suddenly, there is no reason as to why such a/|nuge amount snould be paid as remuneration. Thnat both|the trustees are husband and wife and therefore, they|Nave apportioned the profits among themselves. The|remuneration is exorbitant. Tne autnorisation for sucn aspayment is not in accordance with law. On considering|the material, the Assessing Officer came to the conclusion| that a sum of Rs.12,00,000/- per annum to Sri Sunit|Gupta and a sum of Rs.6,00,000/- per annum to Smt. SimiGupta would be a reasonable remuneration. Therefore,|tne same was allowecd to that extent. 2. Secondly, during the year, the Managing Trustee,Sri Sunit Gupta visited almost seven countries. The)explanation offered was that the trips are for the purposesof soliciting business. The visit pass of Singapore shows|that it is for social purpose. Therefore, the Assessing|Officer|concluded.that.IT ISnotdbDusinessviSa.Newzealand visa snows tnat it is a visitor's visa and not a'business visa. Visa for European country shows that it is |‘not for business’. Therefore, the Assessing Officer came|to the conclusion that tne said expenses cannot De'considered towards business purpose. Hence, tne}expenditure was allowed to the extent of 50% of the sumdebited to foreign travel. Questioning the same, an.appeal was filed before the Commissioner of Income Tax| 2. Secondly, during the year, the Managing Trustee,Sri Sunit Gupta visited almost seven countries. The)explanation offered was that the trips are for the purposesof soliciting business. The visit pass of Singapore shows|that it is for social purpose. Therefore, the Assessing|Officer|concluded.that.IT ISnotdbDusinessviSa.Newzealand visa snows tnat it is a visitor's visa and not a'business visa. Visa for European country shows that it is |‘not for business’. Therefore, the Assessing Officer came|to the conclusion that tne said expenses cannot De'considered towards business purpose. Hence, tne}expenditure was allowed to the extent of 50% of the sumdebited to foreign travel. Questioning the same, an.appeal was filed before the Commissioner of Income Tax| (Appeals). Tne appeal was partly allowed. The entire|amount paid as remuneration to the Directors was allowed.So far as expenses incurred towards foreign travel is concerned, the same was disallowed. Aggrieved by the|same, an appeal was filed by the Revenue and the'assessee filed cross-objections before the Tribunal. The)Tribunal dismissed the appeal filed by the Revenue and thecross-objection filed by the assessee was partly allowed Dysetting aside the disallowance, so far as foreign travel is concerned. Questioning the same, the Revenue has filed|this appeal. — 3. By the order dated 6-6-2011, the appeal wasadmitted to consider the following substantial question of law: Whnetner tne finding of the IncomeTax Appellate Tribunal in upnolding|the view of Commissioner of [ncome|Tax(Appeals)witnregardtoremunerationOf|Rs. 1,68,78,000/- paid to trustees even tnougn tne!same is against to provision’ ofSection 40A(2)(b) of the Income Tax|Act? 4. Learned counsel for the appellant contends thatyet another question of law arises for consideration, whichreads as follows: | Whether, on the facts and in the|circumstancesOf|the|CdSé@,the|Tribunal was right in allowing foreign|travel expenses wnen the aSssesseéhasNog|establisnedthatSsUCNexpenditure was incurred exclusively|in connection with business affairs of the assessee and as sucn ingredients|of Section 37(1) of the Income Tax|was not fulfilled Dy assessee to claim.as sucn2 Hence, we have heard learned counsels on both thesubstantial questions of law. 5. On hearing learned counsels, we are of the viewthat tne said question of law would also arise for!consideration. Hence, the appeal is considered on both thesubstantial questions of law. So far as question of |payment of remuneration is concerned, the Commissioner|of Income Tax (Appeals) was of the view that the!remuneration paid to the Directors was disciosed in tne}return of income. Consequently, Sri Sunit Gupta had paid|tax of Rs.42,90,611/- and Smt. Simi Gupta nad paid tax of Rs.27,50,960/-. Tne returns of income were accepted Dythe Commissioner of Income Tax (Appeals) and was'acknowledged by the Assessing Officer in his remand)report. Tnat the reasonability of the expenses incurred Dythe appellants Trust must be tested considering the!relevant yardsticks and there cannot be a= subjectiveopinion of the Assessing Officer in this regard. The Trust|nas been created for the purpose of doing business. Trust|nas earned income and the remuneration is paid to tne} trustees. The trustees have also paid taxes for the'remuneration received by them. Therefore, it is not for|the Assessing Officer to conciude what is an appropriate|payment or remuneration to be paid to the trustees. The!Hon’ble Supreme Court in the case of S.A. BUILDERS LTD.Vv. THE COMMISSIONER OF INCOME TAX (APPEALS),reported in (2007) 288 ITR O1 (SC) held that the'reasonableness of the expenditure is to be judged from tnepoint of view of the businessman and the Revenue cannot|sit In the arm chair of the businessman to decide what is/reasonable and what is not. Under these circumstances,we are of the view that there is no error committed by the|Commissioner of Income Tax (Appeals) or by the Tribunal,which calls for any interference. Consequently, the.findings recorded by the Tribunal in upholding the view of|the Commissioner of Income Tax (Appeals) with regard to remuneration of Rs.1,68,78,000/- paid to the trustees is just and proper. Therefore, the first substantial question| of law is answered in favour of the assessee and against|the Revenue. 6. So far as the second substantial question of law isconcerned, the Assessing Officer disallowed the claim)Dased on the type of visa, wnich the trustee nad producedfor consideration. The assessee had gone for specific)Dusiness purposes to extend his business. He visited|various countries for the purpose of doing business. It)does not mean that under a tourist visa, no Dusiness can|be transacted. sTnere is no material to Indicate tnat nobusiness was done by the assessee in these trips.|Therefore, the order of the Commissioner of Income Tax|(Appeals) as well the Tribunal is just and proper. Under|the circumstances, we hold that in the facts andcircumstances of the case, the Tribunal was right in)allowing the foreign travel expenses incurred by the.trustee and thereby, the ingredients under Section 37(1)|of the Act was fulfilled. The second substantial question of | @/A�10�/70A.2.5�17�:/F632�6:�4-.�/00.00..�/75�/8/1704�4-.��.F.73.����� �<<625178@D��4-.�/>>./@�10�510>60.5�6::�����&#�����������&#��������������������������FE�