2023 (11) TMI 992 - AT - Income Tax

Revenue's appeal dismissed on section 14A disallowance and section 40A(2)(b) salary payments to relatives

Assistant Commissioner of Income Tax, Central Circle-1, Surat Versus J.B. & Brothers Pvt. Ltd.

ITAT Surat dismissed Revenue's appeal on two grounds. First, regarding disallowance under section 14A, the Tribunal upheld CIT(A)'s deletion of addition, ... Disallowance u/s 14A - CIT(A) deleted addition observing assessee has own sufficient funds for making investments which generate exempt income - HELD THAT:- This ground raised by the Revenue is squarely covered in assessee’s own case, by the order of the Tribunal [2019 (7) TMI 2002 - ITAT SURAT] as held assessee is having a owned funds to the extent of 436 crores as on 31.03.2013 investments made by the assessee to generate the exempt income only to the extent of 8.05 crores. Therefore, the ld.CIT(A) reasonable presumed that assessee has invested only own funds no borrowed funds. By considering the facts and circumstances of the case, we find that there is no error passed in the order passed by ld.CIT(A), therefore ground raised by the Revenue is dismissed. Disallowance of salary expenses u/s 40A(2)(b) to relatives of the Directors - No substantial educational qualification of 4 lady members who have been given the salaries[shareholders of company] - also they do not have substantial educational qualification and do not have special skill related to diamond, except the long association with assessee-company - HELD THAT:- We note that assessee is in the business of manufacturing of polished diamond out of rough diamonds and for that skill is acquired by virtue of experience only. Thus, AO put more emphasis only on education, however, we note that education is different than the experience. In most of the Industries, a person is paid higher salary by virtue of his experience in that Industry. Besides, we note that the payment of salary was made by assessee month-to-month basis and subject to TDS deduction. The salary is paid by cheque. Employees to whom the salaries are being paid are taxed in the higher bracket of 30 % tax rate hence there is no motive to reduce the tax of the company by paying the said salaries. We note that diamond business is a peculiar nature of business and for that confidential and reliable persons are very much required, therefore, assessee would decide that who is reliable persons for his business and how much salary is to be paid. AO cannot sit on the arm chair of the assessee-company`s Board of Directors and decide that who is reliable persons and how much salary is to be paid for the loyalty. Hence, we note that payment of salary by assessee does not exceed the fair market value prevailing in the market. Therefore,payment of salary is fully justified, and addition sustained by ld CIT(A) is reasonable. Decided against revenue. Issues Involved:1. Deletion of addition under Section 14A of the Income Tax Act.2. Disallowance of salary expenses under Section 40A(2)(b) of the Income Tax Act.Summary:1. Deletion of Addition under Section 14A:The Revenue's appeal contended that the CIT(A) erred in deleting the addition of Rs. 10,60,911/- made by the Assessing Officer under Section 14A of the Income Tax Act. The CIT(A) had observed that the assessee had sufficient own funds for making investments that generate exempt income. The Tribunal noted that this issue was covered by its earlier decision in the assessee's own case for AYs 2013-14 and 2014-15, where it was held that the assessee had sufficient own funds and thus, it was presumed that own funds were used for investments yielding exempt income. The Tribunal found no reason to interfere with the CIT(A)'s order and dismissed the Revenue's ground.2. Disallowance of Salary Expenses under Section 40A(2)(b):The Revenue challenged the CIT(A)'s decision to restrict the disallowance of salary expenses to Rs. 19,20,000/- as against Rs. 48,00,000/- made by the Assessing Officer. The Assessing Officer had disallowed the salary paid to four relatives of the Director, arguing that the payments were made to avoid Dividend Distribution Tax and that the relatives lacked the necessary qualifications and skills. The CIT(A) observed that the relatives had been associated with the company since its inception and had been paid salaries for rendering services. The CIT(A) allowed an increment of 20% on their previous salaries, deeming it justifiable, and restricted the disallowance to Rs. 19,20,000/-. The Tribunal upheld the CIT(A)'s decision, noting that the salary payments were made through cheques, subjected to TDS, and the relatives were taxed in the higher bracket, indicating no tax avoidance motive. The Tribunal found the payment of salaries justified and dismissed the Revenue's ground.General Grounds:The Tribunal noted that Grounds 3 to 5 raised by the Revenue were general in nature and did not require adjudication.Conclusion:The Tribunal dismissed the appeal filed by the Revenue, upholding the CIT(A)'s decisions on both issues. The order was pronounced on 26/10/2023.