2016 (9) TMI 549 - AT - Income Tax

Tribunal grants relief on remuneration and FOC expenses, deems daughter-in-law's increase excessive.

The Tribunal partially allowed the appeal, granting partial relief on the disallowed remuneration and full relief on the disallowed Free of Cost (FOC) ... Disallowance under Section 40A(2) - reasonableness of remuneration - bona fide payment to relative - maximum marginal rate and tax evasion - CBDT Circular on payments to relatives - business expenditure - free of cost as sales promotion - genuineness of expenseDisallowance under Section 40A(2) - reasonableness of remuneration - bona fide payment to relative - maximum marginal rate and tax evasion - CBDT Circular on payments to relatives - Allowance of salary paid to daughter in law vis a vis disallowance under Section 40A(2). - HELD THAT: - The Tribunal examined whether remuneration of Rs. 20,70,833/- paid to the assessee's daughter in law could be disallowed under Section 40A(2) on the ground of being family payment intended to evade tax. The authorities noted a 350% increase in remuneration while turnover rose by about 30%. The assessee relied on CBDT Circular No.6 P (1968) and on the fact that both payer and payee were assessed at the maximum marginal rate, arguing absence of tax evasion motive. Applying the principle that payments between relatives should be treated as bona fide unless there is evidence of tax evasion, the Tribunal accepted that no evasion was shown because the recipient was assessed at the maximum marginal rate. However, the Tribunal also found the increase in remuneration disproportionate to the rise in turnover and, on consideration of the nature of services rendered, assessed a reasonable remuneration at Rs. 1 lakh per month. On that basis the Tribunal confirmed a limited disallowance while deleting the remainder. [Paras 8]Disallowance under Section 40A(2) partly sustained: reasonable remuneration fixed at Rs. 1 lakh per month and excess disallowed; the balance of the addition deleted.Business expenditure - free of cost as sales promotion - genuineness of expense - Claimed expenditure on free of cost (FOC) accessories - whether disallowable for lack of justification. - HELD THAT: - The AO disallowed FOC claims on the ground that such expenditures were nil in the preceding year and no plausible justification or scheme was furnished. The assessee produced deal sheets, invoices and customer particulars before the CIT(A) showing accessories supplied free with machinery as a competitive sales promotion measure; the transactions were with non related parties. The Tribunal noted that similar FOC expenditures were accepted in the subsequent assessment year after inquiry and that the genuineness of the transactions was not doubted by the authorities. Given that these were bona fide business promotion expenses and evidence of the transactions was furnished, the Tribunal held that disallowance was not warranted. [Paras 15]Disallowance of FOC expenditure deleted; expenditure treated as allowable business promotion expense.Final Conclusion: The appeal is partly allowed: the addition under Section 40A(2) relating to remuneration is partly confirmed to the extent found unreasonable (reasonable salary fixed at Rs. 1 lakh per month and excess disallowed) while the disallowance of FOC business promotion expenses is deleted. Issues Involved:1. Addition made under Section 40A(2) towards payment of salary to assessee’s daughter-in-law.2. Disallowance of the entire amount spent on Free of Cost (FOC) items.Issue-wise Detailed Analysis:1. Addition made under Section 40A(2) towards payment of salary to assessee’s daughter-in-law:The assessee paid a salary of Rs. 20,70,833 to his daughter-in-law, Smt. Seema Bhandari, during the assessment year 2012-13, compared to Rs. 4,60,000 in the preceding year. The Assessing Officer (AO) restricted the allowable remuneration to Rs. 4,60,000 and disallowed the excess amount of Rs. 16,10,833, citing lack of plausible explanation for the significant increase and potential profit reduction through related-party transactions. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO’s findings, noting that the increase in turnover did not justify the 350% increase in remuneration.The assessee argued that Smt. Seema Bhandari was taxed at the maximum marginal rate, negating any tax evasion motive. The assessee cited CBDT Circular No. 6-P and various judicial precedents to argue that Section 40A(2) should not apply in bona fide cases where no tax evasion is evident. The assessee also provided details of Smt. Bhandari’s role and the increase in business turnover as justification for the remuneration.The Tribunal considered the facts and noted that Smt. Bhandari had been working with the assessee since financial year 2007-08 and was actively involved as Chief Executive Officer. Given that both the assessee and Smt. Bhandari were taxed at the maximum marginal rate, the Tribunal found no grounds for tax evasion. However, the Tribunal deemed the 350% increase in remuneration excessive and considered Rs. 1 lakh per month reasonable, resulting in a partial disallowance of Rs. 8,70,833.2. Disallowance of the entire amount spent on Free of Cost (FOC) items:The AO disallowed Rs. 16,26,229 claimed as FOC expenses, noting that the assessee failed to provide justification and that such expenses were nil in the preceding year. The CIT(A) upheld the disallowance due to lack of justification during assessment and appellate proceedings.The assessee argued that FOC items were provided to customers as part of sales promotion tactics in a competitive environment. Detailed evidence, including deal sheets and invoices, was submitted to support the claim. The assessee contended that these transactions were with non-related parties and were part of prudent business practices to increase turnover. It was also noted that similar FOC expenses were accepted in subsequent assessment years.The Tribunal found that the FOC items were given to non-related parties and were part of sales promotion tactics. The genuineness of the expenses was not doubted by the lower authorities. Considering the acceptance of similar expenses in subsequent years, the Tribunal deemed the disallowance of Rs. 16,29,229 unjustified and deleted it.Conclusion:The appeal was partly allowed, with partial relief granted on the disallowed remuneration and full relief on the disallowed FOC expenses. The Tribunal’s order was pronounced in open court on 3rd August, 2016.