Artisans Micro Finance Pvt. Ltd., New ... vs Assessee

Artisans Micro Finance (P) Ltd. Vs. The Income Tax Officer, 13, N block Market, 2nd Floor, Ward 2(1), New Delhi G.K.-1, New Delhi-110 048

(PAN AAGCA 2395 D)

(Appellant) (Respondent)

Date of hearing : 26.02.2015 Date of Pronouncement : 17.04.2015

Appellant by : Sri S. Srinivasan, CA Respondent by : Smt. Y Kakkar, DR

ORDER

PER SHRI N.K. SAINI, AM:

1. This is an appeal by the assessee against the order dated 17.04.2012 of

CIT(A)-V, New Delhi.

2. The following grounds raised in this appeal are reproduced:-

"1. The Learned Commissioner of Income Tax (Appeals) has erred -

a) in disallowing a sum of Rs. 14,93,657/- by restricting the remuneration to 20% of the gross receipts without considering -

i) The legitimate need of the business; ii) The work done by the Directors and their qualification and experience. ITA No.1610/Del /2013 2

b) in disallowing the sum of Rs. 14,93,657/- only because the ratio of Directors

remuneration was 44.60 percent of the total revenue and the company did not have profit in the year under consideration.

c) in invoking Section 40A(2)(b) without appreciating that this is the first year and the turnover increased in the next years because of the Directors efforts.

2. The Learned Commissioner of Income Tax (Appeals) has erred in confirming the order without considering the submissions and the documents produced before him

3. The appellant prays tor appropriate relief based on the said grounds of appeal and the facts and circumstances of the case."

3. From the above grounds it is noticed that only grievance of the assessee

relates to the disallowance of Rs.14,93,657/- made by the AO by invoking the

provision and Section 40A(2)(b) of the Income Tax Act, 1961 (hereinafter referred

to as the Act in short).

4. The facts of this case in brief are that the assessee filed its return of income on

29.09.2008, declaring a loss of Rs.30,28,331/-which was processed u/s 143(1) of the

Act. Later on, the case was selected for scrutiny. During the course of assessment

proceeding, the AO noticed that the assessee had debited employees' remuneration

at Rs.47,87,489/- which included Rs.27,08,050/- paid to the Directors. The AO

pointed out that the salary paid to the Directors was 56.57% of the total salary

expenses and 44.60% of the total receipt of Rs.60,71,967/-. He asked the assessee to

give justification for salary expenses. The assessee submitted that the Directors were

getting higher salary in their previous job. The AO observed that the chart furnished

by the assessee revealed that the ratio of Directors' remuneration to the total income

has gradually declined from 44.60% during the year under consideration to 19.94%

in the AY 2009-10 and 16.10% during the AY 2010-11 which shows that receipts ITA No.1610/Del /2013 3

has increased over the years but the Directors' remuneration has remained more or

less constant which looked very unreasonable and excessive. The AO restricted the

remuneration to Directors to 20% of receipts. Accordingly, remuneration of

Rs.12,14,393/- was allowed and the remaining amount of Rs.14,93,657/- was

disallowed and added to the income of the assessee u/s 40A(2(b) of the Act.

5. Being aggrieved, the assessee carried the matter to the Ld. CIT(A) and

submitted as under:-

"The Company had 2 full time professional Directors who were earlier employed in the holding company viz. M/s. Fabindia Overseas Pvt. Ltd. as detailed below:

i) Ms. Dilpreet Sokhi Singh joined the Fabindia Overseas Private Limited as Chief Financial Officer on 1st February 2003. The Company is the retail Brand Company and major retail player in Indian niche market. The Product range consist of Garments for men, women, children and home furnishing such as bed linen, bath linen, table Linen, Floor Covering, Kitchen Linen. Fabindia exports to over 25 Countries worldwide both to wholesalers as well as retailers. It has 75 retail stores all over India. She was controlling the finance of all the stores all over India.

She took over as Market Region Head of Fabindia Overseas Pvt. Ltd. And coordinated with all store Managers to increase sales of the Company in April 2005.

She is a qualified Chartered Accountant and also qualified CPA from the USA.

ii) Mr. Prakash Tripath, a Commerce Graduate, started his career with Indian Institute of Management, Ahmedabad as Research Investigator in various projects to rural development and craft. Spearheading the concept of an income generating programme for rural artisans in the craft sector, he worked towards organizing them into a sustainable association. As the founder co-coordinator for Artisans Alliance Jawaja, Beawar (Rajasthan), a joint project of IIMA and National Institute of Design, Ahmedabad, he was instrumental in making this concept a success. In 1991 he has joined the Desert Artisans Handicrafts Pvt. Ltd, Jodhpur, growing to Managing Director by 2007. As Managing Director of DAH, the pilot community owned company (COC), he took the COC to its full potential expanding its base to six locations covering 4 States. He moved to Artisan Micro Finance Pvt. Ltd., New Delhi as a full time Executive Director in 2007 bringing with him 25 years of experience as a grass roots organizer amongst artisans and craft workers in the states of Rajasthan, Madhya Pradesh and involved in forming the COCs and handling existing COCs. Presently, he is overall managing one of the COCs, Desert Artisans Handicrafts Jaipur Limited as Managing Director. ITA No.1610/Del /2013 4

Further since they were involved in the group and were expertise in finance & community managed companies respectively. Even before the learned Income Tax Officer the details were submitted regarding -

a) the qualification and experience of Directors;

b) the fact that they do now own any shares nor have any interest in the company excepting being professional Directors; and

c) the remuneration paid to them is not excessive or unreasonable having regard to the fair market value for the services rendered by them.

Since this is the first year of the company, the turnover was not achieved to the extent and the Directors remuneration appeared to be on higher side. This is further explained that in the next 2 years with the increase in the turnover the percentage of remuneration of the Directors has been reduced to 16.10% as given in the chart below:

Particulars Assessment under Year Ended Year Ended consideration 31.03.2009 31.03.2010 Total Income 6,071,967.00 14,661,663.00 17,253,615.00 Director 2,708,050.00 2,923,152.00 2,778,240.00 Remuneration Ratio % % % Director 44.60 19.94 16.10 Remuneration /total Income

While framing the assessment order, the Learned Income Tax Officer without appreciating the fact has invoked the provisions of Section 40A(2)(b) and disallowed an amount of Rs.14,93,657/- by restricting the Directors remuneration to 20% of the receipt. The copy of our letter dated 20.12.2010 filed before the learned Income Tax Officer is enclosed at Annexure-1 wherein it would be amply clear that-

i) Ms. Dilpreet Singh was hitherto getting salary from M/s. Fabindia Overseas Pvt. Ltd. as per Form 16 issued by the company; and

ii) Mr. Prakash Tripati was getting salary from M/s. Desert Artisans Handicrafts Pvt. Ltd. as per Form 16 issued by the company. These 2 Directors were earlier associated win the above cited companies i.e. Ms. Dilpreet Singh in Fabindia Overseas Pvt. Ltd. and Mr. Prakash Tripati in Desert Artisans' Handlcrafts Pvt. Ltd. and were drawing more salary and as such no disallowance U/s 40A(2)(b) is called for."

6. The assessee also referred to the paras 72 and 74 of the Circular No.

6P(LXXXVI-66) 1968 of the CBDT and submitted that the reasonableness of the

expenditure has to be judged having regard to (a) fair market value of the goods, ITA No.1610/Del /2013 5

services or facilities for which the payment is made; (b) the legitimate needs of the

business or profession; (c) the benefit derived by or accruing to the taxpayer from

the expenditure. It was further stated that the AO could disallow u/s 40A(2) of the

Act only that portion of the total expenditure which in his opinion was excessive or

unreasonableness but the reasonableness was to be seen from the viewpoint of the

businessman and not of the Revenue authorities. The reliance was placed on the

judgment of the Hon'ble Delhi High Court in the case of Hive Communication (P)

Ltd. Vs. CIT reported in [2011] 12 taxmann.com 287. The assessee also submitted

efore the Ld. CIT(A) as under:-

"1. Ms. Dilpreet Singh was earlier employed with M/s Fabindia Overseas Pvt. Ltd. and was getting a remuneration of Rs.29,54,990/- as per copy of Form 16 enclosed herewith at Annexure-3.

2. Mr. Prakash Tripathi was earlier employed with M/s. Desert Artisans Handicrafts Pvt. Ltd. and was getting a remuneration of Rs.13,02,471/- as per copy of Form 16 attached at Annexure-4.

Their bio-data and also the proof of work done by them during the year under consideration has also been given vide our letter dated 16.04.2012 and it has been established that because of the work of these directors that the turnover of the company increased three times in three years, The remunerations paid to these directors are in no way excessive or unreasonable and it is only because of their efforts the turnover of the company increased from Rs.60 lakhs to Rs.1.72 crores. The profit earned for the year ended 31.03.2011 was Rs.69.47 lakhs."

6.1 The reliance was placed on the following case laws:-

i. Abbas Wazir (P.) Ltd. Vs. CIT (2003) 265 ITR 77 (All).

ii. CIT Vs. Edward Keventer (P.) Ltd. (1972) 86 ITR 370 (Cal). iii. CIT Vs. Edward Keventer (P.) Ltd. (1978) 115 ITR 1499 (SC) iv. CIT Vs. Shatrunjay Diamonds (2003) 261 ITR 258 (Bom). v. CIT Vs. Computer Graphics Ltd. (2006) 285 ITR 84 (Mad.) ITA No.1610/Del /2013 6

7. The Ld. CIT(A) after considering the submissions of the assessee confirmed

the disallowance made by the AO by observing in Para 4 of the impugned order

which reads as under:-

"4. The issue involved and the submissions made by the appellant have been considered. As submitted by the appellant the appellant company is a fully owned subsidiary of M/s. Fabindia Overseas Pvt. Ltd. It has 2 full time professional Directors who were earlier employed in the holding company viz. M/s. Fabindia Overseas Pvt. Ltd. These directors were paid Rs.27,08,050/- as remuneration which works out to 56.57% of total salary expenses and 44.6% of total receipts of Rs.60,71,967/-. The AO has found the remuneration claimed in respect of these directors as unreasonable keeping in view the provisions of the Section 40A(2)(b) and has disallowed Rs.14,93,657 /- restricting the remuneration to 20% of receipts which works out to Rs.12,14,393/-.

Section 40A(2)(b) deals with expenditure which is found unreasonable keeping in view the legitimate business needs of an assessee and the services rendered by the 'person'. The ratio of the judgements of the Calcutta High Court and of the Supreme Court referred to by the appellant speak of the normal circumstances and is applicable in normal circumstances. In the appeal under consideration the appellant is a loss making concern-it has-declared loss of Rs.30,28,331/- on gross receipts of Rs. 60r71,967/-. The claim of payment of remuneration of Rs.27,08,050/- to two directors in the aforesaid circumstances does not satisfy the test of human probability. Moreover, to control unreasonable payment of remuneration to directors of the public limited companies, Section 309 of, the Companies Act, 1956 has prescribed limits for the payment of the remuneration to directors. Although the appellant is a private company, yet the claim of payment of remuneration to the directors is required to be reasonable with the business needs of the appellant; it should not be simply to defraud the revenue. The purpose of Sec.40A(2)(b) is also to check such claims. Therefore, the action of the AO is confirmed and the appeal of the appellant is dismissed."

8. Now, the assessee is in appeal. The Ld. counsel for the assessee reiterated the

submission made before the authorities below and further submitted that the AO

without bringing any material on record was not justified in holding that the

remuneration to the Directors was excessive and that the Ld. CIT(A) was not

justified in confirming the action of the AO. Ld. counsel for the assessee further ITA No.1610/Del /2013 7

submitted that no disallowance was made in the subsequent years, therefore, the

disallowance made by the AO and confirmed by the Ld. CIT(A) was not justified.

9. In her rival submissions, the Ld. DR strongly supported the orders of the

authorities below and further submitted that the assessee was a loss making concern,

but the remuneration given to the Directors was highly excessive.

10. We have considered the rival submission of both the parties and carefully

gone through the material available on record. In the present case, it is noticed that

one of the Directors, namely, Ms. Dilpreet Singh is a Chartered Accountant and also

qualified CPA from the USA. She was earlier employed with Febindia Overseas

Private Ltd. as a Chief Financial Officer and another Director, Mr. Prakash Tripathi

is a commerce Graduate, he started his career with the Indian Institute of

Management, Ahmedabad as a Research Investigator in various projects. Later on,

he joined the Desert Artisans Handcrafts Pvt. Ltd., Jodhpur in 1991 and grown to

Managing Director in the said company by 2007, therefore, both the Directors were

well qualified and having the requisite experience in finance and community

managed company. In the instant case, the contention of the ld. counsel for the

assessee that no disallowance was made in the subsequent year was not rebutted. It

is also noticed that Ms. Dilpreet Singh was getting a remuneration of Rs.29,54,990/-

when she was earlier employed with M/s Fabindia Overseas Pvt. Ltd. and Mr.

Prakash Tripathi was getting a remuneration of Rs.13,02,471/- from M/s Desert

Artisans Handicrafts Pvt. Ltd. Jodhpur wherein he was earlier employed. Therefore, ITA No.1610/Del /2013 8

the remuneration amounting to Rs.11,40,000/- and Rs.15,68,050/- respectively

received by them from the assessee cannot be said to be excessive by keeping in

view, their previous experiences and earlier employment. Moreover, the AO had not

brought any material on record to substantiate that as to how and in what manner the

remuneration paid to the Directors was excessive. He had also not given any basis

for allowing the remuneration @ 20% of the total receipts, We, therefore, by

considering the totality of the facts as discussed hereinabove are of the view that the

disallowance made by the AO and sustained by the Ld. CIT(A) was not justified.

Accordingly, the same is deleted.

11. In the result, appeal filed by the assessee is allowed.

(The decision was pronounced in the open Court on 17th April, 2015.)

Sd/- Sd/-

(C.M. GARG) (N.K. SAINI) Judicial Member Accountant Member

Dated: 17th April, 2015. Aks/-

Copy forwarded to 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi