Hive Communiction Pvt. Ltd. vs Commissioner Of Income Tax
2011 Latest Caselaw 3218 Del

                             REPORTABLE
*               IN THE HIGH COURT OF DELHI AT NEW DELHI

+                          ITA 306/2011

                        JUDGMENT DELIVERED ON: JULY 08,2011


HIVE COMMUNICTION PVT. LTD.                       . . . APPELLANT

                         Through : Mr. Satyen Sethi,. Advocate with
                                   Mr. Arta Trana Panda, Advocate

                              VERSUS

COMMISSIONER OF INCOME TAX                       . . .RESPONDENT

                         Through:        Mr.Kiran    Babu,        Sr.
                                         Standing Counsel

CORAM :-

         HON'BLE MR. JUSTICE A.K. SIKRI
         HON'BLE MR. JUSTICE M.L. MEHTA

         1.     Whether Reporters of Local newspapers may be
                allowed to see the Judgment?
         2.     To be referred to the Reporter or not?
         3.     Whether the Judgment should be reported in the
                Digest?


A.K. SIKRI, J. (ORAL)

1. The assessee/appellant is engaged in the business of

advertising and media. For the assessment year 2005-06, it filed

return declaring total income at `19,67,165/-. The assessment

was completed under section 143 (3) of the Income-Tax Act

(hereinafter referred to as the Act) at a total income of

`62,37,332/-. While making this assessment, the AO found that

Directors of the assessee company were paid remuneration. The

two Directors namely Mr. R.P. Singh and Mr. Vishal Sharma were

receiving the remuneration of `7.20 lacs and `9.60 lacs

respectively. According to the Assessing Officer since the job

profile of both the Directors were same namely client

management, remuneration paid to Mr. Vishal Sharma was

excessive by `2.40 lacs in comparison with the remuneration

given by Mr. R.P. Singh thus invoking the provisions of Section

40A (2) of the Act. The AO disallowed a sum of ` 2.40 lacs paid to

Mr. Vishal Sharma thereby bringing the remuneration of both the

persons at par i.e. 7.20 lacs.

2. Another Director Mr. Sushil Pandit was given remuneration of

`25,20,000/-. He was having job profile of Media Consultant

which was different from the job profile of aforesaid Directors

namely client management. Still the Assessing Officer was of the

view that the remuneration of `25.20 lacs paid to him was

substantially higher than what was paid to other two directors, he

took into consideration the fact that one M/s Utopia

Consultingwho does the job of media consultancy for the

assessee company as an independent person was paid

professional charges of ` 6 lacs. The Assessing Officer held the

view that the remuneration of Mr.Sushil Pandit should not be

more than double the amount paid to M/s Utopia Consulting. On

this basis, he formed an opinion that the professional charges

paid to Mr. Sushil Pandit should be `12 lacs and on this basis

invoking the provisions of Section 40A (2) of the Act, he

disallowed a sum of `13.20 lacs as unreasonable. In the process

he also noted that Mr. Sushil Pandit was holding 65% shares in

the company and, therefore, provisions of Section 40A (2) were

clearly attracted.

3. The assessee preferred appeal there against which was

dismissed upholding the disallowance made by the AO. Still

aggrieved, the assessee preferred appeal before the Tribunal.

This appeal has been decided vide impugned orders dated

30.6.2010. The Tribunal has deleted the addition of ` 2.40 lacs

made on account of remuneration paid to Mr. Vishal Sharma

holding that the same was not excessive. However, the deletion

in respect of Mr. Sushil Pandit in the sum of ` 13.20 lacs had been

upheld. It would be pertinent to mention that the Tribunal has

held the view that comparison to Utopia is incorrect for the

reasons that Utopia was not being remunerated on an ongoing

basis as the payment was made only in respect of one project and

whereas Mr. Sushil Pandit was working throughout the year as its

Managing Director with media consultancy portfolio. Still the

Tribunal has upheld the disallowance on the basis of share

holding of the directors taking note of the fact that Mr.Sushil

Pandit was holding 65% in the company and his remuneration

was much more than the remuneration paid to other two

Directors. The Tribunal thus opined that remuneration paid to Mr.

Sushil Pandit is excessive and unreasonable.

4. Dissatisfied with the aforesaid outcome of the Tribunal, the

appellant has approached this Court by filing present appeal

under Section 260-A of the Act which we have admitted on the

following substantial question of law:-

"Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in upholding the disallowance of `13,20,000/- out of remuneration paid to Mr. Sushil Pandit by invoking the provisions of Section 40A(2) of the Act?"

5. With the consent of the parties, we have heard the matter

finally at this stage itself.

6. After considering the arguments of the counsel for the

counsel for the parties, we are of the opinion that the question of

law needs to be answered in favour of the assessee and against

the revenue. Our reasons for this are as follows:-

It is not in dispute that Mr. Sushil Pandit holds 65% share

holding in the assessee company as against 20% and 15% held by

Mr. R.P. Singh and Mr. Vishal Sharma respectively. For this

purpose, it can also be safely assumed that provisions of Section

40A(2) of the Act can be attracted. However, in order to sustain

the addition made by the AO it is also essential to show that the

remuneration paid to Mr. Sushil Pandit was excessive or

unreasonable. Having regard to the fair market value of the

goods, services or facilities for which the payment is made. This

yardstick is provided in sub Section (2) of Section 40A which

reads as under:-

"40A Expenses or payments not deductible in certain circumstances.

(1)......

(2) (a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b0 of this sub- section, and the [Assessing] 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 for the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction."

7. The question whether the expenditure is excessive or

unreasonable in a given case has to be examined keeping in mind

the services (with which we are concerned in the present case) for

which payment is made. In the process the legitimate needs of

the business or profession of the assessee or the benefit derived

by or accruing to the assessee from such services is also to be

kept in mind. After applying this test if it is found that the

expenditure is excessive or unreasonable excess, excess or

unreasonable portion of the expenditure is to be disallowed. We

have also kept in mind the provisions of sub Section 2 (b) of

Section 40-A of the Act as per which the burden is upon the

assessee to establish that the price paid by it is not excessive or

unreasonable as in this case Mr.Sushil Pandit was holding

substantial portion of share namely 65% in the assessee

company.

8. When we apply the aforesaid principle in the facts of this

case, we find that the assessee has been able to discharge the

burden that the price paid by it to Mr. Sushil Pandit is not

excessive or unreasonable.

9. As accepted by the Tribunal itself, the case of Utopia

Consulting does not represent a valid comparable case for the

reason that it is not being remunerated on an ongoing basis as

the payment had been paid only in respect one project. The

Assessing Officer had made addition keeping in mind the fee paid

to Utopia Consultancy. Once that basis is locked out, nothing

remained for comparison. However, the Tribunal adopted another

comparison namely that Mr. R.P. Singh to whom the remuneration

of `7.20 lacs was paid, there was an internal comparable case. In

the process what is totally glossed over and ignored by the

Tribunal is that Mr. R.P. Singh was having the job profile of the

client management whereas the job profile of Mr. Sushil Pandit

was that of Media Consultant. Therefore, the case of Mr. R.P.

Singh was also comparable.

10. It is to be kept in mind that the assessee is in the business of

advertising and media. In such a business, the role of a media

consultant is much more important than of the role of a client

management. In fact, considering the nature of business, media

consultancy is the back bone of such business and plays much

more pivotal role then the persons handling client management.

For this reason, if Mr. Sushil Pandit was paid higher remuneration

then Mr. R.P. Singh, it could not be treated as excessive or

unreasonable, more so, when the two cases were not at par and

could be treated as comparable by any standards.

11. We may also refer to the scope of Section 40A (2) as

explained by CBDT in Circular No. 6P, dated 6th July, 1968. The

CBDT clarified that while examining the reasonableness of

expenditure the Assessing Officer is expected to exercise his

judgment in a reasonable and fair manner. It should be borne in

mind that the provision is meant to check evasion of tax through

excessive or unreasonable payments to relatives and associate

concerns and should not be applied in a manner which will cause

hardship in bona fide cases.

12. It will also be useful to refer to the judgment of Allahabad

High Court in Abbas Wazir (P) Ltd. Vs. CIT (2004) 265 ITR 77

wherein the High Court held that even while invoking the

provisions of Section 40A(2) of the Act, the reasonableness of the

expenditure for the purpose of business has to be judged from the

point of view of a businessman and not that of the revenue. The

approach has to be that of a prudent businessman and the

reasonableness must be looked into from businessman point of

view. Similar view is held by the Madras High Court in CIT Vs.

Computer Graphics Ltd. (2006) 285 ITR 84.

13. In CIT Vs. Edward Keventer (Private) Ltd. (19720 86 ITR

370, the Calcutta High Court considering identical provision in

1922 Act, it was held that the section places two limitations in the

matter of exercise of the power. The section enjoins the

Assessing officer in forming any opinion as to the reasonableness

or otherwise of the expenditure incurred must take into

consideration (i) the legitimate business needs of the company

and (ii) the benefit derived by or accruing to the company. The

legitimate business needs of the company must be judged from

the view point of the company itself and must be viewed from the

point of view of a prudent businessman. It is not for the Assessing

Officer to dictate what the business needs of the company should

be and he is only to judge the legitimacy of the business needs of

the company from the point of view of a prudent businessman.

The benefit derived or accruing to the company must also be

considered from the angle of a prudent businessman. The term

"benefit" to a company in relation to its business, it must be

remembered, has a very wide connotation and may not

necessarily be capable of being accurately measured in terms of

pound, shillings and pence in all cases. Both these aspects have

to be considered judiciously, dispassionately without any bias of

any kind from the view-point of a reasonable and honest person in

business.

14. The aforesaid judgment of Calcutta High Court was affirmed

by the Apex Court in CIT Vs. Edward Keventer (Private) Ltd.

(1978) 115 ITR 149 (SC). In the same line is the judgment of

Bombay High Court in the case of CIT Vs. Shatrunjay Diamonds

(2003) 261 ITR 258 (Bom).

15. We thus answer the question in favour of the assessee and

in the negative holding that the Tribunal was not correct in law in

upholding disallowance or ` 13.20 lacs out of remuneration paid

to Mr. Sushil Pandit by invoking the provisions of Section 40A(2) of

the Act. The disallowance made is thus deleted and this appeal is

allowed.

16. No order as to cost.

(A.K. SIKRI) JUDGE

(M.L. MEHTA) JUDGE JULY 05, 2011 skb