Matador Services, Kolkata vs Department Of Income Tax

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IN THE INCOME TAX APPELLATE TRIBUNAL, KOLKATA 'C' BENCH, KOLKATA

Before Shri Mahavir S ingh (Judicial M ember) and Shri Sham im Ya hya (Accountant M ember)

I.T. A. No. 722/ KOL/ 2011 Assessment year : 2007-2008

Assistant Commission er of Income Tax,.............. ...........Appellant Circl e-32, Kolkata, 10B, Middleton Row, 2 n d Floo r, Kolkata-70 0 071

-V s.- M/ s. Matador Services,...................................................Respondent 25B, Park Street, Kolkata-70 0 016 [PAN : AAEF M 4792 P]

Appeara nces by : Shri Sa njay, JCIT, Sr. D.R., for th e Depart ment Shri Arvind Aga rwal, Advocate, for th e as sess ee

Date of conclud in g the hea rin g : Janua ry 14, 2015 Date of p ronouncing th e o rd er : Janua ry 28, 2015

Per Shamim Yahya:

This is an appe al filed by the Rev enue again st the o rder of ld. Commissioner of In co me Tax (App eals)-XIX, Kolkata in App eal No. 87/CIT(A )-XIX/Ci r-32/Kol/09-10 dated 15.02.2 011 for the ass ess men t year 2 007-08.

2. We no te th at the re is a delay of on e day in filing of th e appeal. Upon hea rin g both the ld. Counsels and p erusin g the mate ri al available on record, we are inclin ed to condone the delay of one day. Accordin gly, the delay is condoned and th e app eal i s ad mitted .

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3. The g rou nds of appeal read as und er:-

(1) That the ld. CIT(Appeals) has err ed in law in allowing r elief in resp ect to disallowa nce u /s 4 0A(2)(b) without consid eratio n of the mat eria l bro ught on r ecord .

(2) That the ld. CIT(Appeals) has err ed in law in allowing r elief in resp ect to disallowa nce u /s 1 4A by holdin g that rule 8D was ap plicable o nly pro spectively, despite the fact that the said rule merely provided a machinery to comput e disallowances as requir ed u/s 14A which was effective fro m AY 20 01-02.

(3) That th e ld. CIT(A)' s o rder may b e r evers ed.

4. Apropos G round No.1; disallowance u nder s ection 40A(2)(b), the as se sse e-fi rm is co nstituted of th re e pa rtn ers, b ein g Anil Ku ma r Jhunjhunwala, HUF, and Ms. Vedika & Vidhi Jhunjhunwala, daughte rs of Sh ri An il Kumar Jhunjhunwala, who i s the Karta of the p artne r HUF . An examin ation of the break-up of the annual salary paymen ts as produced on requisitio n revealed th at, out o f the tot al salary pay outs of Rs. 50,30,957/-, the annual sala ry paid to Shri An il Kuma r Jhunjhunwala, Karta of the partn e r HUF, and Sh ri K.P. Jhunjhunwala, his father, stood at Rs. 24,00,000/- and Rs.7,20,000/- resp ectively.

5. Assessing Offic er wa s of the opinion t hat the abov e payme nt was mad e to the person s unde r s ection 40A(2)(b). The As ses sin g Offi ce r opined that the above payment was exc essive. As sessin g Off icer made th e disallowance in thi s case by holding a s under:-

"(a ) Th e firm is engag ed in th e business of repairs and servicing o f motor cars of Hyundai make, and relat ed trade in spare parts, et c. It runs i ts activities from two prin cipal outlets, b eing one facto ry at Tiljala , and another at Ho wrah. How ever, i t was stat ed du ring hearings that there was no contract bet ween Hyundai Motors a nd the ass ess ee-firm. It s link with the car manufacturers is s een to flow throu gh a compan y M/s . J.J . Automotives ltd., which is a major s elling agent of Hyunda i Cars in B engal, and is a co mpany in which partner s of th e firm and their family members o f immediate direct a scendan cy h old 26.08% of the shares in a ggregate.

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(b) The assess ee firm's r elations with the company is close. The bulk of th e assess ee firm' s pu rchases o f spare p arts are so urced fro m th e sa id comp any, a ma jo r part o f its sales also involves the same company. The firm also u ses the p la nt a nd machinery of M/s. J.J. Auto motive Ltd., and r eimburses th e r ent, ma in tenance as well as elect ricity charges liabilities of the said compan y, for th e us e of its Ho wrah worksho p. The firm ha s also taken on rent o ut on e wo rkshop in Tiljala fro m M/s. J.J. Industrial Corporatio n, yet another group con cern. As may be expect ed, th e compan y M/s. J.J. Auto motive Ltd ., is va stly superior in comp arison with the a ss essee firm in terms of fund invested (o ver 18 crores), gross earni ngs (o ver 93 crores), spread of activities , et c.

(c) From the a nnual report of the compa ny, (procured fo r purposes of this a ss essm en t), it is s een tha t the company names only two individuals as being key management p ersonn el of the compan y, and they are Shri Anil Jhunjhunwala, a nd Shri K.P. jhunjhu nwalla , both d irectors. Y et, d espite th e experien ce and kno wledge that th e two persons are stat ed to possess, the compan y paid Shri Anil Jhunjh unwalla an annu al sala ry o f o nly Rs. 1 lakh , while Shri K.P. Jh unjhunwalla was p aid o nly Rs.50,00 0/-.

(d) Thus, the relation between th e firm and th e comp any is truly symbiotic. On th e one han d, the firm is in eff ect a down str eam an cillary business o f the company's business, and the compan y pro vides the firm both with infrastru ctu r e, as well a s source of bu siness in come. On th e oth er hand , the firm pays salary to the t wo per sons who represent the top ma nagement of the comp any far in exces s o f th e mo des t su ms paid by the flagship compan y.

In co urs e of these p roceedings, it was contend ed that the amounts received by th e two per so ns wer e o ffered for tax in the hand s of the individual, and thus no ta x was avoided. F urther, the disallo wing the amo unts wou ld r esult in th e do uble taxation of the a mounts. This plea was consider ed , but not found acceptable.

Taxatio n of differen t entities cannot be clubbed togeth er except as sp ecifically provided fo r in the statu e. F urth er, disallowance u nder s ectio n 4 0A(2)(b) do es no t debar the assess ee firm from paying specified persons whatev er sums it ma y deem fit, it only p rovides that the said payments are no t to be consider ed deductible busin ess exp en ses in the hands of the firm. In any case, such a logic would render all disallowa nces under section 40A(2)(b) to b e examples of double taxation.

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In view of the fact s and the cir cumstan ces as discu ss ed, I hold that the salaries pa id to shri K.P. Jh unjhunwalla and Shri Anil Jhunjhunwalla are excessiv e and ther efore, not allowable as business exp ens e in t erms of s ectio n 40A(2)(b) of th e Act.

In con sideration of the fact that Shri K.P. Jhunjhunwalla performs o nly advisory service in th e fi rm, a nd in view of the fact that the busin ess of th e firm does not involve any substan tial business process es or a cquisitions, manoeuvring et c. I am of the con sidered opinion that a sum of Rs.2,40,000/- is reaso nable as salary to Shri K.P . Jhunjhunwalla.

Further, in vi ew o f Sh ri Anil Jh unjhunwalla's position in the admin istra tive and techn ical hierarchy of the firm as the chief executive, I am of the considered opinio n that a sum of Rs.6,00,000/- is commen su rat e with th e duti es o f the overall ma nagemen t as performed by Shri An il Jhu njhunwalla.

The amo unt of Rs.22,80,000/- being the a mount b eing paid to these persons in ex cess of the amounts allowed above, is disallowed in the hands of the firm".

Again st the abov e o rder, asses see preferred ap peal befo re the ld. CIT(App eals).

6. Ld. CIT(Appeals) d elet ed the additi on after con sid ering the submission s of the assessee by ho ld in g as und er:-

"On car eful consideration of the fa cts a nd in law, I am of th e opinio n that the AO wa s not jus tified in making th e disallowance of salary to the ext ent o f Rs.22,80,0 00/- by invo king provisions of section 40A(2)(b) of th e Act . It is a fact on record th at out of the thr ee partn er s of th e app ellant-firm, one o f the partner was HUF and other t wo partner s w er e th e lad y members of th e family and hence th e en ti r e bu sin ess of th e app ellant firm was man aged a nd controlled by Sh ri K.P. Jhun jh unwa lla and Shri Anil Kumar Jhunjhu nwalla. It is also a fact on record that year aft er year, th e turnov er o f the appellant firm h as increased substan tially an d that was due to the effo rts of th ese two persons. Both Shri K.P. Jhunjhu nwalla an d Shri Anil Kumar jhunjhu nwalla a re h aving lot of experience and backgrou nd in the a uto mobile busin es s an d as a resu lt they wer e a ble to increase the busin ess of the app ellant firm. Hen ce, th e paymen t o f salary made to th em for thei r s ervi ces and efforts ca nnot b e disallo wed by invo kin g p rovision s of section 40A(2)(b) o f th e Act. Th e Ho n'ble Supreme Court in the case of Sasoon J. David & Co. Pvt. L td. -vs.- CIT, 118 ITR I . T. A . N o. 7 22 / KOL ./ 20 1 1 As ses sm e nt y e ar : 20 07 - 20 0 8

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261, 275 had la id down th at o rdina rily it is for the assessee to decide wheth er a ny exp en ditu re shou ld be incurred in th e cours e o f its o r his busines s. Su ch expenditure may b e incurr ed voluntarily or without a ny n ecessit y a nd if it is uncured for promotin g the busin ess, th e assess ee can claim deduction thereof even though there was no compelling necessity to incur such exp enditur e. Ho w ever, in the cas e of app ellant firm, it has incu rr ed exp enditur e o n accou nt of salary to Shri K.P. Jhu njhunwalla and Sh ri Anil Kumar Jhunjhu nwalla wholly and exclusively fo r th e purpose of its busines s as th e entir e bu siness of th e a ppellant firm was controlled and managed by them. In th e case of Aluminiu m Corporation of India L td. -vs.- CIT reported in 86 ITR 11, 17 (SC), it was la id down by the Ho n'ble Court that the t ru e test of an exp en ditu re laid out wholly and ex clusively for th e purpose of trade or business is that it is incurr ed by th e assess ee as inciden tal to its trad e for th e purpose o f keeping the tra de going . The expen ditur e in curr ed must be for commercial exp edien cy. Various oth er jud icial pronoun cem ents reli ed upon by th e appellant also advances the cla im o f the app ellant. In view of the above, the AO is directed to delet e the addition of Rs.22,80 ,000/- mad e by him by invoking the provisions o f secti on 40A(2)(b) of th e Act. T h e ground nos. 2, 3, 4 and 5 are allowed".

7. Again st the abo ve ord er of ld. CIT(App eal s), Revenu e i s in appeal before the Tribunal.

8. We h ave h eard th e riv al sub missions and perused the materi al av ailable on record. W e find that in th is c ase, the A sses sin g O fficer h as mad e the disallowance of the sala ry paid to Shri K.P. Jhunjhunwala and Sh ri Anil Ku mar Jhunjhunwala by in voking the p rovisions of section 40A(2)(b). Ass essin g Offi cer ha s opined that the s alary paid to them was exces sive wh en the same is compared to payments to other e mployees of the firm. The A sse ssi ng Office r was also of the opinion that the salary received was e xcessive when co mpared to the sala ry receiv ed by these two person s fro m the Co mp any where they are Di rectors. By holding so, Assessing Offi ce r ha s o pined that Shri K.P. Jhunjhunwala should have been paid a sum of Rs.2 ,40,000/- and Sh ri Anil Kumar Jhunjhunwala should hav e been p aid a su m of R s.6,00,000/-.

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9. Now we no te that it i s a settled l aw that As ses sin g Of ficer c annot sit into the sho es of the ass es see and d ecid e wh at is reasonable. Hon'ble Apex Co u rt in the case of CIT, Bombay -vs. Walchand & Co. Pvt. Limited repo rted in 65 ITR 3 81 has held that "in applying the tes t of commer cial exped ien cy fo r det erminin g wheth er the expend itur e wa s wh olly and exclusively laid out fo r business, the expenditure has to be adju dged from the p oint of view of the busin essman and n ot of reven u e". Now we note that in this ca se this is not the first ye ar in which the salary has be en p aid to the afores aid p erson s. Sal ary h as been paid to th es e p erson s as un der in the prec edin g a ssess ment ye ar and no d isallowance has been mad e:

Sh ri Anil Sh ri K.P. Jhu njhunwalala Jhunjhunwalala 2003-04 10,80,000/- -- 2004-05 14.40,000/- -- 2005-06 18,00,000 4,40,0 00/-

Now we note that when th e earlier years, the sal ary paid which was much more than what th e A ss essin g Of fic er h as op in ed to be re aso nable in thi s year an d no dis allowance was made in e arli e r yea rs. Revenue c annot be allowed to ch an ge its stan ce withou t any chan ge i n the f act s and circu mstanc es of th e c as e. When th e revenue has t aken a vie w th at the sal ary as high as R s.22,40,000/- was not to be di s allowed in the precedin g year, it cannot no w hold that in th e p resent ass es sme nt yea r the sal ary should only be Rs.8,40,000/-. Hon'b le Delhi High Court in the case of CIT -vs. - Dalmia Pro moters Pvt. Ltd., reported in 281 ITR 346, has held th at fo r rejecti ng the v iew t aken in earlie r yea rs, th ere mu st be ch ange in the fact situat ion or la w. In this y ear, we do not find that the Assessing Of fic er h as brou ght on reco rd any change in fact situ ation or law warrantin g di sallowance o f s alary paid.

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10. We fu rther n ote tha t the As sessin g Officer has mad e the disallowance under s ection 40A (2)(b). Sectio n 40A(2)(b) man dat es fo r disallowance of the ex ces sive portion that wh en the paym ent ha s been mad e to the person s a s sp eci fied in the said sectio n which in the Assessing Of ficer's o pinion is exces sive or unreasonab le having reg ard to the fai r mark et valu e of the good s, s ervice or f acilities fo r which the pay ment is mad e o r the legiti mate need s of the busin ess or prof ession of the as ses se e. Now in th e p re sent c ase, we find that the As se ssin g Of fice r has not b rou ght on any reco rd tha t the fai r mark et v alue of the services rend ered by these t wo perso ns was only Rs.8,40,000/-. Asse ss in g Office r has made the co mpari son with other employees in the firm. Now this cannot be a bench- ma rk of the c ompari so n as th e duties and respo nsibiliti es and the s ervices p e rf ormed b y these perso ns ha s no t been said to be si milar to the o the r p erso ns comp ared. F urther, A ssessi ng Officer's esti mate th at Sh ri K.P. Jhunjhunwala should be paid Rs. 2,40,000/- and Sh ri Anil Jhunjhunwala should be paid Rs.6,00, 000/- is not based upon any co gent mat erial an d wa s based upon th e surmi se of the Assessing Officer, which is no t sust ainab le. We further note that the as se sse e's coun sel h as mad e the submi ssion s be fo re th e ld. CIT( Appeals) that the as ses se e's tu rnov er h as inc reased by huge amo unt due to the adv ice, guidan ce and busin ess acu men o f these t wo p ersons as u nder:-

Financi al Year Turnover in Rs /L acs 200 2-03 50 0 200 3-04 65 8 200 4-05 74 5 200 5-06 82 4 200 6-07 80 3 200 7-08 86 1

11. Thus in the background of the afores aid discussion, we hold that the A ss essin g Office r has no t brou ght on reco rd any co gen t mat erial to I . T. A . N o. 7 22 / KOL ./ 20 1 1 As ses sm e nt y e ar : 20 07 - 20 0 8

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substanti at e that th e sala ry paid to Sh ri K.P. Jhun jhunwala and Sh ri Anil Jhunjhunwala was to be di sallo wed und er section 40A (2 )(b) as discussed abo ve. To recap this is p ri marily due to the fact that co mparative substanti al high er sala ry was p aid in earlie r years and no disallowan ce was mad e and the re is no chan ge in th e f acts an d c ircumstan ces du rin g the current y ear. As ses sin g Offi cer was not b rought about any cogen t basis fo r his e sti mat e o f what is exc essi ve and unreasonable. It is only the surmi se of the A sses sin g Officer which is not sustain able. The ass ess ee- firm has record ed substanti al increase in tu rnov er which suppo rts th e increa se in sal ary of these two persons . Accordin gly, we do not find any infirmity in the ord er of ld. CIT(Appal s) and acco rdin gly we uphold the same.

12. Apropos Groun d No. 2 ; di sallowan ce u nder s ection 14A:- On thi s issu e the Asse ssin g Off icer noted th at the ass es see mad e investm ent of Rs. 6,13,910/- in shares and it is earn in g dividend exemp ted fro m tax. The Assessing Of ficer invok ed the provision s of s ection 14 A and co mputed the disallowance in te rms o f Rule 6D amountin g to Rs.42,480/-. Upon as se sse e's app eal, ld. CIT(Appe als) ac cepted th e a ssessee' s submi s sion that p rovisions of Rule 8D are not ap plicable in th e yea r und er app eal. H e held that the disallo wan ce under se ction 14A by applying the provision s of Rule 8D could o nly be mad e f rom ass es sme nt year 2008 -09 onward s. However, h e held that he was not conv inced with the submi ss ion o f the as se sse e that it h as no t incurred any expenditure in relation to exemp ted inco me. H e referred to the ITAT, Kolk ata Bench d ecis ion in s eve ral c ase s that 1% of the exempted in co me sh ould be treat ed as exp enditure incu rred in relation to the exempt ed inco me. In view o f the above, ld. CIT(App eals) di rect ed th e As ses sin g Of ficer to rest rict th e disallowan ce under section 14A at the rate o f 1% of the exemp ted in come. Against the abo ve order, Revenue is i n app eal before the T ribunal.

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13. We hav e heard b oth the partie s and peru sed the reco rds. We find that the ld. CIT(Appe als) is co rrect in holding that Rule 8D i s not app licable in the i mpug ned as ses sment year. Hen ce, comp utation of disallowance by applying Rule 8D is not sustain able. However, it also has been accept ed b y this Tribu nal in the case of Reo Ag ro Ltd. -vs.- ITO repo rted in [2013 ] 144 ITD 141 that 1% disallo wanc e of exe mpted inco me meets the ends of justic e b efo re applicat ion of Rule 8D. In this view of th e matte r, we upho ld the order of the ld. CIT(Ap p eal s).

14. In the result, the appeal filed by the Revenue stand s di smissed.

Orde r p ronounced in th e open Co urt on 28 t h Jan uary , 2015.

Sd /- Sd /- Maha vir Singh Shamim Yahya (Judici al Me mber) (Acco untant Member) Kolkata, th e 28 t h day of January, 2015 Cop ies to : (1) Assistant Commission er of Income Tax, Circl e-32, Kolkata, 10B, Middleton Row, 2 n d Floo r, Kolkata-70 0 071

(2) M/ s. Matador Services, 25B, Park Street, Kolkata-70 0 016

(3) Commission er of Incom e-ta x (Appeals) (4) Commissioner o f In com e Tax (5) The Departmen tal Representativ e (6) Guard File By order

Assistant Registrar Income Tax App ellate Tribunal Kolkata Ben ch es, Kolkata Laha/Sr. P.S.