Delhi High Court

Hindoe Technologies Pvt. Ltd. vs Deputy Commissioner Of Income Tax on 18 November, 2011

Author: A.K.Sikri

*            IN THE HIGH COURT OF DELHI AT NEW DELHI

+                       ITA No.411 of 2011

                                Reserved on: 16th September, 2011.
%                             Pronounced on: 18th November, 2011.


      HINDOE TECHNOLOGIES PVT. LTD.                 . . . APPELLANT

                              Through:    Mr. R.M. Mehta, Advocate.

                               VERSUS

      DEPUTY COMMISSIONER OF INCOME TAX             . . .RESPONDENT

                              Through:    Mr. N.P. Sahni, Sr. Standing
                                          Counsel.

CORAM :-
    HON'BLE MR. JUSTICE A.K. SIKRI
    HON'BLE MR. JUSTICE SIDDHARTH MRIDUL

      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.

1. The present appeal seeks to challenge the order dated

30.4.2010 passed by the Income Tax Appellate Tribunal

(hereinafter referred to as „the Tribunal‟) for the assessment

year 2006-07. Briefly stated, the appellant/assessee is into

the business of providing CAE/design services to various

customers in Indian and abroad. It is the case of the

assessee that the assessee company was started by four

persons, who were also its Directors, viz., (i) Mr. Ambuj

Sharma, who has a Master‟s degree in Mechanical

Engineering from IIT Roorkee; (ii) Mr. R. Srinivasan, who

has a Bachelors Degree in Production Engineering from

Bharathiar university, Coimbatore; (iii) Mr. S. Nakkeeran,

who has a Master‟s degree in Mechanical Engineering in

Designs from Anna University, Tamil Nadu and (iv) Mr. B.

Sridhar, who has a Bachelor degree in Electricals and

Electronics from BITS, Pilani (Rajasthan).

2. Vide Board‟s resolution dated 21.3.2005, the following

remuneration was fixed by the appellant as payable to its

Directors for Financial Year 2005-06 (relevant to the

Assessment Year 2006-07):

(i) Mr. Ambuj Sharma @ `60,000/- per month.

(ii) Mr. R. Srinivasan @ `40,000/- per month.

(iii) Mr. S. Nakkeeran @ `60,000/- per month

(iv) Mr. B. Sridhar @ `60,000/- per month.

3. It was also decided by the assessee company that while the

remuneration payable to Mr. Ambuj Sharma, Mr. S.

Nakkeeran and Mr. B. Sridhar would be payable as

'consultation fee', the remuneration payable to Mr. R.

Srinivasan would be payable as 'salary'.

4. The Assessing Officer (AO) in his assessment order, made an

ad hoc disallowance of `14,50,000/- out of the consultancy

fees of `22,37,850/- paid to the three Directors under Section

40A(2)(b) of the Income Tax Act ('the Act' for brevity). Out

of the aforesaid total disallowance of `14,50,000/-, an ad hoc

disallowance of `12,50,000/- was made out of total

consultancy fee of `13,56,425/- paid to the two Directors,

viz., Mr. B. Sridhar and Mr. S. Nakkeeran whereas the

remaining disallowance of `2,00,000/- was made out of the

consultancy fee of `8,81,425/- paid to another Director, Mr.

Ambuj Sharma.

5. The disallowance of `12,50,000/- out of the consultancy fee

paid to Mr. B. Sridhar and Mr. S. Nakkeeran, was made by

the AO on two grounds:

(i) That a salary of `4,80,000/- paid to the said two

Directors (Mr. B. Sridhar and Mr. S. Nakkeran)

was in addition to the consultancy fee; and

(ii) That the assessee failed to produce professional

degrees and income tax returns (ITRs) of the

aforesaid two Directors, viz., Mr. S. Nakkeeran

and Mr. B. Sridhar.

Whereas the disallowance of `2,00,000/- out of the

consultancy fee paid to Mr. Ambuj Sharma, was made by the

AO on the ground that the said Director had claimed

expenses against the consultancy fee in his return of income

tax.

6. The appellant/assessee filed appeal against the aforesaid

order before the CIT (A). It was argued that the AO failed to

appreciate that the assessee had paid salary and

consultancy fees to different Directors. It was submitted

that the assessee had paid `2,00,000/- to one Director, viz.,

Mr. R. Srinivasan whereas consultation fee was paid to the

remaining three Directors, viz., Mr. Ambuj Sharma, Mr. S.

Nakkeeran and Mr. B. Sridhar. It was also submitted that this

fact was duly brought to the notice of the AO from the profit

and loss account along with the relevant schedule containing

the details of salary and the consultancy fee paid to the

Directors. It was, thus, submitted that the observation of the

AO that the said two Directors were paid consultation fee

along with salary is wrong, perverse and against the record.

7. In respect of the second ground, the assessee submitted that

the AO was duly informed about the professional

qualifications of Mr. S. Nakkeeran and Mr. B. Sridhar.

However, as the said two Directors had already left the

assessee company, the assessee could not provide the

degrees and the copies of ITRs of the said Directors, but to

assist the AO, the assessee vide its letter dated 26.8.2008,

along with the proof of resignation of the said two Directors,

also provided the Permanent Account Number and

residential address of the said two Directors and requested

the AO to call for the information directly from the said two

Directors. But, the AO failed to make any enquiries in this

behalf and made the disallowance without any basis

whatsoever.

8. Before the CIT (A), the assessee had also produced degrees

of both the aforesaid Directors and also placed copy of ITR of

Mr. B. Sridhar, as the assessee had received the same by

that time from the respective universities from where the

Directors had passed out. Besides, the assessee also

submitted that all the Directors were earlier working with the

blue chip companies like, NIIT, Hero Honda, Mechanical

Dynamics (USA) before joining hands and starting the

assessee company on their own. It was also assessed that if

they had not formed this company and were doing a job,

each of them could fetch a salary of more than `1 lac per

month, while the assessee company was paying them much

lesser. It was further submitted that similar remuneration

was paid to all the Directors in the earlier years also and

were never disallowed. It was further submitted that the

entire business of the assessee company right from the

marketing to the project execution was done by all the

Directors themselves and no other highly qualified person

was employed in the company. The assessee also

highlighted that there had been an increase in business form

the previous year, and the company had executed orders

worth `101.47 lacs, which was due to the personal contacts,

experience and professional competence of the Directors and

in this regard copy of profit and loss account was also

provided to the AO. A profile of the assessee company was

also provided to the AO to show the nature of the business

of the assessee company and the involvement of the

Directors in the same.

9. However, the CIT (A) did not accept the case of the

appellant and maintaining the order of the AO, dismissed the

appeal. The assessee filed further appeal before the

Tribunal, which has met with the same fate. It is under

these circumstances, the instant appeal is filed under

Section 260A of the Act.

10. Though number of substantial questions are raised, for our

purpose, question of law No. (a) would suffice, as it covers

all the aspect. It reads as under:

"Whether the Tribunal was correct in law and on facts in upholding the order of the CIT (A) and the AO and confirming the disallowance of `14,50,000/- of consultancy fees paid to the Directors under Section 40A(2)(b) of the Income Tax Act, 1961 on the ground that payment of consultancy fee was in addition to the payment of salary to the Directors when, in reality, only consultation fee was paid to the three Directors?"

11. When this matter came up for hearing on 24.2.2011,

submission for the learned counsel for the appellant was that

the Tribunal had not considered various pertinent aspects

and had also proceeded on wrong presumption. His entire

thrust, therefore, was that the matter be remitted back to

the Tribunal for afresh consideration in view of the judgment

of this Court in Mayur Recreational Dev Services Ltd. Vs.

CIT, 313 ITR 190. Learned counsel reiterated the

submissions were where advanced before the Authorities

below and noted above. He referred to the Board‟s

resolution for remuneration and salary to be paid to the

Directors and submitted that there were following factual

inaccuracy in the order of the Tribunal:

(1) The Tribunal has noted that "we find that this is

an admitted position that this payment of

consultancy fees to these Directors are paid in

addition to payment of remuneration to them."

It is argued that this observation is wrong as the

assessee had paid the salary and consultancy fee

to the different Directors. The assessee paid

`4.82 lacs to Mr. R. Srinivasan, whereas

consultancy fee was paid to the remaining three

Directors.

(2) In Para 6, the Tribunal has observed:

"Neither any Board resolution is made available nor any agreement is brought on record with regard to payment of consultancy fees."

It is submitted that this observation is erroneous,

since the powers were duly covered by the

Board‟s resolution, which was placed on record

before all the Authorities below and even CIT (A)

recorded this fact in its order.

12. We are in agreement with the submission of the learned

counsel for the appellant that these are factual errors

committed by the Tribunal, which have influenced its

decision. That apart, the learned counsel has referred to

certain other evidence placed on record, which is not

considered by the Tribunal. In these circumstances, we

accept the contention of the learned counsel for the

appellant that it is a fit case to be remitted back to the

Tribunal for afresh adjudication. The impugned order is

accordingly set aside. We may clarify that we have not

made any observations on the merits of this case. It would

be for the Tribunal to take a view, afresh, after hearing the

counsel for the parties and taking into consideration the

correct factual position.