ROYAL HYDRAULIC P. LTD, MUMBAI v. ITO 7(2)(1), MUMBAI

ITA 8814/MUM/2010 | 2006-2007
Pronouncement Date: 28-02-2011 | Result: Allowed

Appeal Details

RSA Number 881419914 RSA 2010
Assessee PAN AAAFP8247L
Bench Mumbai
Appeal Number ITA 8814/MUM/2010
Duration Of Justice 2 month(s) 12 day(s)
Appellant ROYAL HYDRAULIC P. LTD, MUMBAI
Respondent ITO 7(2)(1), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 28-02-2011
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted SMC
Tribunal Order Date 28-02-2011
Assessment Year 2006-2007
Appeal Filed On 16-12-2010
Judgment Text
1 ITA NO. 8814/MUM/2010 IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI MUMBAI MUMBAI MUMBAI SMC SMC SMC SMC BENCH BENCH BENCH BENCH MUMBAI BENCHES MUMBAI MUMBAI BENCHES MUMBAI MUMBAI BENCHES MUMBAI MUMBAI BENCHES MUMBAI BEFORE SHRI R K PANDA A BEFORE SHRI R K PANDA A BEFORE SHRI R K PANDA A BEFORE SHRI R K PANDA ACCOUNAANT MEMBER CCOUNAANT MEMBER CCOUNAANT MEMBER CCOUNAANT MEMBER ITA NO. ITA NO. ITA NO. ITA NO. 8814/MUM/2010 8814/MUM/2010 8814/MUM/2010 8814/MUM/2010 (ASST YEAR (ASST YEAR (ASST YEAR (ASST YEAR 2006 2006 2006 2006- -- -07 0707 07) )) ) ROYAL HYDRAULIC P LTD 57 RANGAONWALA BLDG 91 MOHD ALI ROAD MASJID BUNDER MUMBAI 400 003 VS THE INCOME TAX OFFICER WARD 7(2)(1) MUMBAI ( (( (APPELLANT APPELLANT APPELLANT APPELLANT) )) ) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) PAN NO. PAN NO. PAN NO. PAN NO.AAAFP8247L AAAFP8247L AAAFP8247L AAAFP8247L ASSESSEE BY NONE REVENUE BY SHRI R K GUPTA/DR PER R K PANDA AM PER R K PANDA AM PER R K PANDA AM PER R K PANDA AM THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER DATED 22.9.2010 OF THE CIT(A)-13 MUMBAI RELATING TO ASSE SSMENT YEAR 2006-07. 2 NOTICE ISSUED THROUGH RPAD BY THE REGISTRY WAS RE TURNED UN-SERVED BY THE POSTAL AUTHORITIES WITH THE REMARKS LEFT. THE REFORE THE APPEAL IS BEING DISPOSED OF ON THE BASIS OF THE MATERIAL AVAILABLE ON RECORD AND AFTER HEARING THE LD DR. 3 THE ASSESSEE IN ITS GROUNDS OF APPEAL HAS CHAL LENGED THE ORDER OF THE CIT(A) IN CONFIRMING THE DISALLOWANCE OF RS. 96 380 /- ON ACCOUNT OF SALARY PAID TO THE DIRECTOR. 4 FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSE E COMPANY IS ENGAGED IN THE BUSINESS OF IMPORTER AND RESELLER OF RUBBER PRO DUCTS AND CHEMICALS. DURING 2 ITA NO. 8814/MUM/2010 THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTED FROM THE TAX AUDIT REPORT AND THE VARIOUS SUBMISSIONS FILED BY T HE ASSESSEE THAT OUT OF THE TOTAL SALARY OF RS. 9 12 144/- PAID TO ITS EMPLO YEES A SUM OF RS. 1 23 120/- HAS BEEN PAID TO THE MANAGING DIRECTOR MR MAZHAR VOHRA AND AN AMOUNT OF RS. 1 92 760/- PAID TO THE DIRECTOR MRS SAMINA M VOHR A . THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN AS TO WHY SUCH SUBSTA NTIAL AMOUNT PAID AS REMUNERATION SHOULD NOT BE TREATED AS EXCESSIVE AN D TO JUSTIFY THE REASONABLENESS. THE ASSESSEE VIDE ITS REPLY DATED 6.11.2008 SATED AS UNDER: SHRI MAZHAR VOHRA LOOKS AFTER THE MARKETING OF THE COMPANY AND SMT SAMINA VOHRA IS IN-CHARGE OF THE COMPANY AND LOOKS AFTER ALL THE ACTIVITIES OF THE COMPANY. THE BOARD OF DIRECTOR HAS APPROVED THE ABOVE DIRECTORS REMUNERATIONS AND RELEVANT COPIES OF THE RESOLUTION S ARE ATTACHED HEREWITH. CONSIDERING THE SALES OF AROUND RS. 70 TO 80 LACS P.A AND SIZE OF THE COMPANY THE ABOVE REMUNERATION PAID TO THE DIR ECTOR IS REASONABLE AND IN LINE WITH THE EARLIER YEARS. 4.1 THE ASSESSEE HAS ALSO FILED VARIOUS CORRESPONDE NCES SIGNED BY THE LADY DIRECTOR AS AN EVIDENCE FOR THE TYPE OF WORK DONE B Y HER. 4.2 HOWEVER THE ASSESSING OFFICER WAS NOT CONVINC ED WITH THE EXPLANATIONS GIVEN BY THE ASSESSEE. HE NOTED THAT M RS SAMINA VOHRA IS DRAWING A SALARY OF RS. 1 92 760/- WHICH IS MORE THAN THE S ALARY DRAWN BY THE MANAGING DIRECTOR AT RS. 1 23 120/-. ACCORDING TO THE ASSE SSING OFFICER SMT SAMINA VOHRA DOES NOT CONTRIBUTE MUCH TO THE ASESSEES BUSINESS EXCEPT FOR SIGNING FEW CORRESPONDENCES WITH THE BANKS. THE MARKETING ASPE CT OF THE ASSESSEES TRADING BUSINESS IS DONE BY THE MANAGING DIRECTOR WHO IS DRAWING LESS SALARY THAN THE LADY DIRECTOR. THEREFORE ACCORDING TO THE ASSESSING OFFICER THE REMUNERATION PAID TO SMT SAMINA MAZHAR VOHRA WHO H APPENS TO BE THE WIFE OF THE MANAGING DIRECTOR IS UNREASONABLE AND EXCESSI VE. THE ASSESSING OFFICER 3 ITA NO. 8814/MUM/2010 FURTHER OBSERVED FROM THE NATURE OF ACTIVITY UNDERT AKEN BY THE ASSESSEE COMPANY THAT THERE ARE TRANSACTIONS TAKING PLACE AM ONG THE GROUP CONCERNS. THEREFORE PAYMENT OF REMUNERATION TO THE DIRECTOR IN GENERAL IS EXCESSIVE AND UNREASONABLE. 4.3 AFTER CONSIDERING THE TOTAL EMPLOYEES COST SHOW N BY THE ASSESSEE FOR THE YEAR THE ASSESSING OFFICER CAME TO THE CONCLUSION THAT SERVICES RENDERED BY MRS SAMINA MAZHAR VOHRA DOES NOT DESERVE A MUCH HIGHE R SALARY FOR SIGNING FEW CORRESPONDENCE LETTERS AND DOES NOT CONVEY THE LEGI TIMATE NEEDS OF THE BUSINESS OR PROFESSION. ACCORDING TO HIM THE COMPANY HAS R EDUCED ITS NET PROFIT BY DIVERTING SUCH A SUBSTANTIAL AND UNREASONABLE AMOUN T OF REMUNERATION TO THE LADY DIRECTOR. IN VIEW OF THE ABOVE HE DISALLOWED AN AMOUNT OF RS.96 380/- BEING 50% SALARY PAID AT RS. 1 92 760/- TO TH LADY DIRECTOR U/S 40A(2)(B) OF THE I T ACT. 5 BEFORE THE CIT(A) THE ASSESSEE REITERATED THE SA ME SUBMISSIONS AS MADE BEFORE THE ASSESSING OFFICER. IT WAS FURTHER SUBMI TTED THAT SMT SAMINA VOHRA IS OVERALL IN-CHARGE OF THE COMPANY AND LOOKS AFTER A LL THE ACTIVITIES OF THE COMPANY. THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS EDWARD KEVENTER P LTD REPORTED IN 115 ITR 149 (SC) WAS ALSO RELIED UPON ACCORDING TO WHICH NO PART OF REMUNERATION PAID TO THE DIRECTOR COULD BE REGARDED AS EXCESSIVE OR UNREASONABLE IF THE LEGIT IMATE BUSINESS NEED OF THE COMPANY AND THE BENEFIT DERIVED BY OR ACCRUING TO I T THERE FROM WERE TAKEN INTO ACCOUNT FROM THE POINT OF VIEW OF A BUSINESSMAN. 4 ITA NO. 8814/MUM/2010 5.1 HOWEVER THE CIT(A) WAS NOT CONVINCED WITH THE ARGUMENTS ADVANCED BY THE ASSESSEE BEFORE HIM AND CONFIRMED THE ACTION OF THE ASSESSING OFFICER BY HOLDING AS UNDER: PERUSAL OF THE FEW CORRESPONDENCES FILED BY THE A PPELLANT SHOWS THAT SMT S M VOHRA HAS MADE CORRESPONDENCE WITH BANK FOR ISSUE OF CHEQUE BOOK/CORRESPONDENCE WITH BANK FOR CHALLANS/CORRESPO NDENCE WITH M/S ANJALI SALES CORPORATION ENCLOSING CHEQUES/CORRESPO NDENCE WITH M/S SWASTIC ENGINEERING WORKS REGARDING PAYMENTS TOWARD S OVERDUE BILLS ETC. APPARENTLY IT SEEMS THAT THESE CORRESPONDENCES ARE MADE IN NATURE OF ADMINISTRATIVE WORK AND DOES NOT INVOLVE MAJOR MANA GEMENT DECISIONS ETC. AS SUCH GIVING A SALARY OF RS. 1 92 760/- TO THE DIRECTOR (WHO LOOKS AFTER MERE ROUTINE WORK VIZ-A-VIS SALARY F RS. 1 23 120/- TO THE MANAGING DIRECTOR IS UNJUSTIFIED. ACCORDINGLY UNDER THE FACTS AND CIRCUMSTANCES OF T HE CASE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER U/S 40A( 2)(B) IS UPHELD . 6 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASSE SSEE IS IN APPEAL HERE BEFORE THE TRIBUNAL. 7 I HAVE CONSIDERED THE ARGUMENTS ADVANCED BY THE L D DR AND PERUSED THE ORDERS OF THE AUTHORITIES BELOW. THERE IS NO DISPUT E TO THE FACT THAT AN AMOUNT OF RS. 1 92 760/- HAS BEEN PAID AS REMUNERATION TO TH E DIRECTOR SMT SAMINA VOHRA. THERE IS ALSO NO DISPUTE TO THE FACT THAT THE ABOVE SALARY PAID TO THE LADY DIRECTOR IS HIGHER THAN THE SALARY PAID TO THE MANAGING DIRE CTOR SHRI MAZHAR VOHRA AT RS. 1 23 120/- WHO HAPPENS TO BE THE HUSBAND OF THE DI RECTOR SMT SAMINA VOHRA. ACCORDING TO THE REVENUE THE SALARY PAID TO THE LA DY DIRECTOR SMT SAMINA VOHRA IS EXCESSIVE AND UNREASONABLE SINCE SHE HAS ONLY MA DE SOME CORRESPONDENCES WITH BANKS FOR ISSUE OF CHEQUE BOOK AND CORRESPONDE NCES WITH M/S ANJALI SALES CORPORATION AND M/S SWASTIC ENGINEERING WORKS FOR P AYMENTS TOWARDS OVERDUE BILLS ETC. 5 ITA NO. 8814/MUM/2010 7.1 IN APPEAL ACCORDING TO THE CIT(A) THESE CORRE SPONDENCES ARE IN THE NATURE OF ADMINISTRATIVE WORK AND DOES NOT INVOLVE MAJOR MANAGEMENT DECISIONS ETC. HOWEVER ACCORDING TO THE ASSESSEE SMT SAMIN A VOHRA APART FROM DOING THIS WORK WAS ALSO OVERALL IN-CHARGE OF THE COMPAN Y AFFAIRS. IN MY OPINION THERE SHOULD NOT BE ANY DISALLOWANCE OF REMUNERATION U/S 40A(2)(B) UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE. IT IS ABUNDANTLY CL EAR FROM THE FACTS BROUGHT ON RECORD BY THE ASSESSING OFFICER AS WELL AS THE CIT (A) THAT SMT SAMINA VOHRA IS REGULARLY ATTENDING OFFICE CORRESPONDENCES WITH V ARIOUS PARTIES AND MAKES CORRESPONDENCES WITH BANKS. 7.2 IT HAS BEEN HELD BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS EDWARD KEVENTER P LTD (SUPRA) THAT NO PART OF REM UNERATION PAID TO DIRECTOR COULD BE REGARDED AS EXCESSIVE OR UNREASONABLE IF THE LEGITIMATE BUSINESS NEED OF THE COMPANY AND THE BENEFIT DERIVED BY OR ACCRUI NG TO IT THERE FROM WERE TAKEN INTO ACCOUNT FROM THE POINT OF VIEW OF A BUSI NESSMAN. ALTHOUGH THE ABOVE DECISION WAS CITED BEFORE THE CIT(A) WHICH I FIND HAS BEEN MENTIONED AT PAGE 3 OF THE ORDER OF THE CIT(A) I FIND THE CIT(A) HA S NOT CONSIDERED THE SAME. HIS FINDINGS IN MY OPINION ARE ON GENERAL BASIS WHILE UPHOLDING THE ACTION OF THE ASSESSING OFFICER. IT IS THE WELL SETTLED PROPOSIT ION OF LAW THAT THE ASSESSING OFFICER CANNOT DIRECT THE ASSESSEE TO CONDUCT ITS BUSINESS IN A PARTICULAR MANNER. IT IS FOR THE ASSESSEE HOW TO CONDUCT ITS BUSINESS IN A PARTICULAR MANNER. IT HAS BEEN SUBMITTED BEFORE THE ASSESSING OFFICER AND THE CIT(A) THAT MRS SAMINA VOHRA WAS OVERALL IN-CHARGE OF THE COMPA NY AND LOOKS AFTER ALL THE ACTIVITIES. THIS ASPECT HAS NOT BEEN PROVED TO BE F ALSE OR UNTRUE. THEREFORE MERELY BECAUSE THE REMUNERATION OF THE LADY DIRECTO R IS MORE THAN THAT OF THE 6 ITA NO. 8814/MUM/2010 MANAGING DIRECTOR THE SAME IN MY OPINION CANNOT B E HELD AS EXCESSIVE OR UNREASONABLE. NO PART OF THE SALARY SHOULD BE DISA LLOWED U/S 40(2)(B) OF THE ACT ESPECIALLY UNDER THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE. IN THIS VIEW OF THE MATTER I SET ASIDE THE ORDER OF THE CIT(A) AND DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION. I HOLD AND DIRECT ACCORDINGLY. THE GROUND RAISED BY THE ASSESSEE IS ACCORDINGLY ALLOWED. 8 IN THE RESULT THE APPEAL FILED BY THE ASSESSEE I S ALLOWED. ORDER PRONOUNCED ON THE 28 TH DAY OF FEB 2011. SD/- ( R K PANDA ) ( R K PANDA ) ( R K PANDA ) ( R K PANDA ) ACCOUNTANT MEMBER PLACE: MUMBAI : DATED: 28 TH FEB 2011 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR ITAT MUMBAI