The Commissioner Of Income-Tax vs M/S Fibres And Fabrics
2021 Latest Caselaw 219 Kant

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     IN THE HIGH COURT OF KARNATAKA AT BENGALURU

        DATED THIS THE 6TH DAY OF JANUARY 2021

                           PRESENT

         THE HON'BLE MR. JUSTICE ALOK ARADHE

                            AND

     THE HON'BLE MR. JUSTICE NATARAJ RANGASWAMY

                 I.T.A. NO.192 OF 2013

BETWEEN:

1.     THE COMMISSIONER OF INCOME-TAX
       C.R.BUILDING
       QUEENS ROAD
       BANGALORE.

2.   THE DEPUTY COMMISSIONER OF INCOME TAX
     CIRCLE - 11 (3)
     RASHTROTHANA BHAVAN
     NRUPATHUNGA ROAD
     BANGALORE
                                         .... APPELLANTS
(BY MR.K.V.ARAVIND, ADVOCATE)

AND:

M/S FIBRES & FABRICS
INTERNATIONAL PVT. LTD.,
NO.21, E-1, II PHASE,
PEENYA INDUSTRIAL AREA
BANGALORE - 560 058.
                                          ... RESPONDENT
(BY MR.V.CHANDRASHEKAR ADV. FOR
    MR.M.LAVA, ADVOCATE)
                         ---
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      THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX
ACT 1961, ARISING OUT OF ORDER DATED 30.11.2012 PASSED
IN ITA NO.1269/BANG/2010 FOR THE ASSESSMENT YEAR 2006-
07, PRAYING TO:
      (i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW
STATED THEREIN.
      (ii) ALLOW THE APPEAL AND SET ASIDE THE ORDERS
PASSED BY THE ITAT, BANGALORE IN ITA NO.1269/BANG/2010
DATED 30.11.2012 CONFIRMING THE ORDER OF THE APPELLATE
COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE
DEPUTY COMMISSINOER OF INCOME TAX, CIRCLE-11(3),
BANGALORE.

     THIS I.T.A. COMING ON FOR HEARING,          THIS    DAY,
ALOK ARADHE J., DELIVERED THE FOLLOWING:

                        JUDGMENT

This appeal under Section 260-A of the Income Tax

Act, 1961 (hereinafter referred to as 'the Act', for short)

has been filed by the revenue The subject matter of the

appeal pertains to the Assessment Year 2006-07. The

appeal was admitted by a Bench of this Court vide order

dated 03.07.2013 on the following substantial question

of law:

"Whether the appellate authorities were correct in allowing remuneration paid to the Managing Director nearly 90% of the returned income of the assessee company ignoring the applicability of Section 40A(2) and also ignoring the facts that the MD's

physical presence was only 15 days in the year and when the Managing Director was not aware of the existence and termination of agreement in favour of SEL wherein huge payments were made by the assessee company under various heads and consequently recorded a perverse finding?"

2. Facts leading to filing of this appeal briefly

stated are that the assessee is engaged in the business

of manufacture and export of readymade garments. The

assessee filed the return of income for the Assessment

Year 2006-07 declaring total income of

Rs.9,03,70,920/-. The return filed by the assessee was

taken up for scrutiny and a notice under Section 143(2)

of the Act was issued on 02.11.2007. The Assessing

Officer by an order dated 08.12.2009 disallowed a sum

of Rs.8,14,25,233/- which was paid as remuneration to

the Director on the ground that there is no material to

establish that the Director had rendered services to the

company warranting payment of Rs.8,14,25,233/-

except being Managing Director. The Assessing Officer

disallowed the entire sum of Rs.8,14,25,233/- which was

paid to the Managing Director. The assessee thereupon

approached the Commissioner of Income Tax (Appeals)

by filing an appeal who by an order dated 11.08.2010

inter alia held that the Managing Director is directly

responsible for business of the company and he has got

sales from Italy and other European countries and

therefore, is entitled for remuneration. In the result, the

addition made by the Assessing Officer was disallowed

and the appeal preferred by the assessee was allowed.

The revenue thereupon approached the Income Tax

Appellate Tribunal (hereinafter referred to as 'the

tribunal' for short). The tribunal by an order dated

30.11.2012, upheld the order passed by the

Commissioner of Income Tax (Appeals). In the aforesaid

factual background, the revenue has filed this appeal.

3. Learned counsel for the revenue submitted

that the finding recorded by the Commissioner of

Income Tax (Appeals) as well as the tribunal that

Managing Director of the assessee has solicited global

orders for the products of the assessee is based on

surmises and conjectures. Learned counsel for the

revenue has also invited our attention to the statement

of the Managing Director of the company, which was

recorded during post survey enquiry and has pointed out

that the answers given by the Managing Director clearly

establish his involvement in the business and from

perusal of his statement, it is evident that he has

expressed his ignorance of any of the contracts signed

by the company and any payments made. It is also

submitted that 90% of the returned income of the

assessee company was paid to the Managing Director as

remuneration. It is further submitted that no material

was produced by the assessee that the Managing

Director had procured the orders globally for the

company. It is also contended that the tribunal

committed an error in shifting the burden on the

Assessing Officer to establish the absence of Managing

Director from the work place and the burden is on the

assessee to establish that the expenditure in the form of

remuneration to the Managing Director was incurred for

the purpose of business and the same was proportionate

to the services rendered to the assessee. It is also

pointed out that under Section 40A(2) of the Act

empowers the Assessing Officer to disallow the

expenditure / payment made to the related person i.e.,

the payment made by a company in favour of a Director

if the expenditure is excessive and unreasonable. It is

also submitted that the aforesaid provision casts a

burden on the assessee to establish that the payment

made in favour of the Managing Director is neither

excessive nor unreasonable and the benefit derived is

commensurate with the payment made to the Managing

Director. In support of aforesaid submissions, reliance

has been placed on decision of the Supreme Court in

'GANAPATHY & CO. VS. COMMISSIONER OF

INCOME-TAX, BANGALORE', (2016) 65

TAXMANN.COM 194 (SC).

4. On the other hand, learned counsel for the

assessee submitted that the Assessing Officer disallowed

the amount paid to the Managing Director solely on the

ground that the Managing Director of the assessee stays

in India not for more than 14 to 15 days. It is further

submitted that the remuneration of the Managing

Director has been taxed in the hands of the Managing

Director under Section 143(3) of the Act and tax has

been deducted at source. It is submitted that the action

of the Assessing Officer in disallowing the payment

made to the Managing Director amounts to double

deduction which is impermissible in law. It is also

contended that Managing Director of the assessee is

responsible for sales and marketing of the companies

products and the remuneration which is paid to him

works out to 50% of the total sales. It is further

submitted that no disallowance is called for as the

amount in question has been taxed in the hands of the

Managing Director and therefore, there is no loss of

revenue to the exchequer. It is also submitted that

concurrent findings of fact have been recorded in favour

of the assessee by the Commissioner of Income Tax

(Appeals) and the tribunal and therefore, no interference

is called for in this appeal. In support of aforesaid

submissions, reliance has been placed on decisions in

'CIT VS. BILAHARI INVESTMENTS PVT LTD', 299

ITR 1, 'CIT VS. EXCEL INDUSTRIES LTD.', 358 ITR

295, 'CIT VS. DURGA PRASAD MORE', (1971) 82

ITR 540 (SC), 'SUDARSHAN SILKS & SAREES VS.

CIT', 300 ITR 205 SC, 'VIJAY KUMAR TALWAR VS.

CIT,        NEW   DELHI',   330   ITR    1    SC/2010,

'K.RAVINDRANATH NAIR VS. CIT',            247 ITR 178

(SC).

5. We have considered the submissions made

by learned counsel for the parties and have perused the

record. Before proceeding further, it is apposite to take

note of Section 37(1) and relevant extract of Section

40A(2)(a) of the Act, which is reproduced below for the

facility of reference:

           37. (1)     Any         expenditure        (not    being
     expenditure         of        the       nature       described

in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".

2) (a) Where the assessee incurs any expenditure in respect of which payment has been or to be made to any person refer- red to in clause (b) of this sub-sections and the Income-tax 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 or the legitimate needs of the business or profession of the assessee or

the benefit derived by or accruing to him there from, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction:

(b) The persons referred to in clause (a) are the following, namely:--

(ii) where the assessee is a company;

     firm,    association     of    persons     or    Hindu
     undivided family               any director of the

company, partner of the firm, or member of the association or family, or any relative of such director, partner or member;

6. Thus, from perusal of the aforesaid

provisions, it is evident that the burden is on the

assessee to establish that the amount was expended

wholly and exclusively for the purpose of business or

profession and Section 40A(2)(a) of the Act permits the

Assessing Officer to disallow the expenditure which is

excessive or unreasonable.

7. From perusal of the order passed by the

Assessing Officer, it is evident that the Assessing Officer

has disallowed the payment made to the Managing

Director merely on the ground that total stay of the

Managing Director in India is for a period 14 to 15 days.

The aforesaid finding has been set aside in appeal by the

Commissioner of Income Tax (Appeals) on the ground

that the Managing Director is directly responsible for the

business of the company an in fact, has brought the sale

from Italy and other European countries and therefore,

is entitled to remuneration. The aforesaid finding has

been affirmed by the tribunal. However, the

Commissioner of Income Tax (Appeals) as well as the

tribunal have completely failed to establish that no

material was produced by the assessee to demonstrate

that the Managing Director had secured the business of

the company from Italy and other European countries.

The provisions of Section 40A(2) which are applicable to

the fact situation of the case have also not been taken

into account by the Commissioner of Income Tax

(Appeals) as well as the tribunal. In the facts and

circumstances of the case, we deem it appropriate to

quash the order passed by the Commissioner of Income

Tax (Appeals) and the tribunal and remit the matter to

the Commissioner of Income Tax (Appeals) to decide the

appeal afresh by taking into account the provisions of

Section 40A(2) of the Act and the fact that the assessee

had failed to adduce any material to show that the

Director of the company had procured business for the

company from Italy and other European countries.

Accordingly, the substantial question of law is answered.

In the result, the appeal is disposed of.

Sd/-

JUDGE

Sd/-

JUDGE

SS