TaxTMI 
TaxTMI 
2019 (10) TMI 1024
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....ocessed under section 143(1) of the Act. Upon scrutiny notice under section 143(2) of the Act dated 02.09.2014 was served upon the assessee. The assessment was finalized on 29.01.2016 by making addition/disallowances of Rs. 3,41,72,205/- on account of employee's benefit expense which was, in turn, deleted by the Learned CIT(A). Hence, the instant appeal before us. 3. The brief facts leading to the instant case is this that upon verification of profit and loss account during the course of assessment proceeding, it was found that the assessee has debited employee's benefit at Rs. 6,25,64,280/- for A.Y. 2013-14 as against such expenditure of last year shown at Rs. 2,83,92,075/-. Since there was a sharp increase in salary expenses as compared to the turnover justification was asked for as to the claim of such expenditure as employee's benefit with supporting evidences. The justification rendered by the Assessee was not found fit. According to the Learned AO, the assessee has debited salary expenditure of Rs. 6,25,64,280/- which is more than thrice as compared to immediately preceding year. It was further noticed from the Board's Resolution for Remuneration of Directors, that one Shr....
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....e employed for only part of the year and therefore, employee costs incurred in the first year of operations would always be lower than employee costs incurred in the subsequent years wherein they were employed for the full year. Thus, employee costs of Rs. 2,83,92,075 incurred in previous year, i.e. AY 2012-13 included salary costs of employees which were employed for only part of a year and hence, their only part salary was included in the salary expenses of AY 2012-13. A copy of salary register showing the actual salary paid in AY 2012-13 is attached as Annexure 2. In connection with the same, a few sample copies of the employment contracts of employees are attached as Annexure 3 which also substantiates that they were there employed only for a part of the year, in FY 2011-12. 1.4 Subsequently, in the captioned year, all these employees which were employed for part of the previous year, were employed for full part of the captioned year and hence their total salary expenses for the entire year was included in the only in captioned year, i.e. FY 2012-13. Therefore, upon a comparison of the annualized salary for same employees which were employed in earlier year, i.e. FY 20....
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....oyed for full part of FY 2012-13. Thus, the observations of the learned AO in relation to increase salary are without any basis. 1.7 Further, the learned AO in his assessment order has stated that Appellant had paid Rs. 65,00,000/- as bonus to the employees, Mr. Lalit Pai which was without any basis or reason. In this regards, the Appellant submits that it had employed Mr. Lalit Pai was appointed as Head - Partnership and Technology of the company. Prior to his appointment, he was Sr. Vice President and Head - Global Data Management of Quintiles Technologies Private Limited where he worked for almost 10 years. He is qualified engineer and has completed his post graduation from MM, Calcutta. His resume is attached as Annexure 7 which shows his rich experience in this field. In his prior organization he was heading business of USD 500 million spread over 6 countries. He had relationships with global pharmaceutical companies in US, Europe and Japan. In view of his rich experience and relationships, he was appointed by the company. In the company he is responsible for building and developing sales plans, mentor sales teams and managing relationships with customers. It was due ....
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....expenses is without any basis and is based on mere surmises and conjectures. 1.12 Commercial expediency of the payments:- Without prejudice to the fact that the Appellant has received services from its employees and there is no dispute with regards to rending of such services, the Appellant submits that reasonableness of employee expenses is not relevant for claiming deduction of expenses under section 37(1). Further, it is submitted that the commercial expediency/ business rationale of a particular expenditure incurred by the Appellant for smooth functioning and furtherance of its business prerogative. Hence, no disallowance under section 37(1) of the Act should be made on the basis that expenses is found to be unreasonable or excessive. 1.13 In this regards, the Appellant humbly submits that the above expense have been incurred wholly and exclusively for the purpose of the Appellant's business and the learned AO has nowhere contended that these expenses were not undertaken for the purpose of business. Accordingly, as all salary expenses were incurred wholly and exclusively for the purpose of business of the Appellant, the same should be allowed as a deductio....
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....pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business..... The purpose shall be purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assesses shall incur it in his capacity as a person carrying on the business..." 1.17 The above observations bring out the following attributes in respect of the expenditure that may be allowable: • what is comprehended as an allowable expenditure is a very wide spectrum of expenditure; • in order that the expenditure qualifies as expenditure incurred 'wholly and exclusively for the purposes of the business', it is not required to conclusively demonstrate that the expenditure was incurred out of a compelling necessity, but was incurred on for the purpose of assessee's business; • It is for the assessee to decide whether any expenditure should be incurred in the course of his business. 1.18 Further, there are various judicial precedents which have recognized that any expenses incurred wholly and exclusively for the purposes of the Assess....
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....business and whether it falls under any of the exceptions carved out under sub-section (2B) thereof, and nothing more. Once it is found that the expenditure had been incurred by the assessee for publicity or advertisement, it is not for the department to consider what commercial expediency justified such expenditure. It is, therefore not permissible for the Assessing Officer to scrutinize the claim any further to examine as to whether in the process any third party has also benefited. The mere fact that on account of the expenditure incurred by the assessee wholly and exclusively for its own business, incidentally some third party is also benefited is no ground to disallow any part of such expenditure. • CIT vs Jagannath Kisonlal(30 ITR 654)(Bom) subsequently approved by the Supreme Court (41 ITR 360), it has been held as follows: "An expenditure may not help an assessee to earn the income or to increase the income, and yet from the point of view of commercial expediency it may be necessary for the business; for instance, it may be necessary to preserve the assets of the business or to increase the reputation of the business. It may not bring in results in the....
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....ed AO that all employees and directors have rendered services during the captioned year. Further, the learned AO has no where disputed payments made to directors were excessive under section 40A(2)(b) of the Act. 1.3 Additionally, the Appellant also submits that remuneration paid to its directors as well as its employees Lalit Paiand Bhavesh Acharya which were treated to be excessive by the Learned AO have been taxed as salary income in hands of its directors and its employees. Further, they are covered in the highest tax bracket of 30 percent. In this Regard, copy of acknowledgment of return of income for AY 2013-14 pertaining to directors, Suresh Ramu and Himanshu Shah and employees, Lalit Pai and Bhavesh Acharya are attached as Annexure 1, Annexure 2, Annexure 3 and Annexure 4 respectively. The said acknowledgment of return of income for the captioned year substantiates that they are covered in highest tax bracket of 30 percent. Hence, as the Appellant as well as its Directors and employees were both assessed tax at the rate of 30%, the issue is revenue neutral. 1.4 The learned AO has failed to appreciate that tax has already been paid on such income by the Dir....
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....uests that the learned AO be directed to delete the said disallowance". Ultimately, addition was deleted by the Learned CIT(A) upon considering such submission made by the Assessee and also upon taking into consideration the financial statement placed before the first appellate authority and the judgment relied upon by the assessee in support of his case. 4. At the time of hearing of the instant appeal, the Learned Counsel appearing for the assessee submitted before us that the error committed by the Learned AO was duly pointed out before the first appellate authority in all counts. Apart from that the commercial expediency of the payments for smooth functioning and furtherance of its business was also duly placed before the authorities below. It was further submitted by the Learned AR that it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profit, the assessee can claim deduction under section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditur....
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....AO has not considered the fact that the Appellant Company was incorporated only on 11 March 2011 and hence, FY 2011-12 was the first year of operation. Subsequently, in the captioned year, all these employees which were employed for part of the previous year, were employed for full part of the captioned year and hence, their total salary expenses for the entire year was included only in captioned year, i.e. FY 2012-13. Therefore, upon a comparison of the annual/zed salary for same employees which were employed in earlier year i.e. FY 2011-12, the same would amount to Rs. 5,90,34,991 against which actual salary paid to them in FY 2012-13 was Rs. 3,62,15,515. Hence, in respect of same employees which were employed in both FY 2011-12 as well as FY 2012-13, there was decrease in their salary expenses by Rs. 2,27,92,740/-. A detailed comparison of the salary paid in FY 2011-12 and FY 2012-13 is attached as Annexure 4. 2.5.1. Further, the Appellant submits that even after considering 49 new employees which were employed only in FY 2012-13, total salary expenses for the FY 2012-13 amounts to only Rs. 5,56,89,030/- as against annuallzed salary expenses of Rs. 5,90,34,991/- which w....
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....he brought on, he contributed to the increase in turnover of the company. The said amount was decided in the employment contract and hence, as per the contractual terms, the same was paid to him. A copy of the contract with Mr. Lalit Pal is attached as Annexure 8 to substantiate the same. Further, Appellant has also deducted taxes due under section 192 of the Act on entire payment made to Mr.Lalit Pai. Hence, the entire expenditure was genuine and TDS was appropriately deducted on the same. Thus, the allegation of the learned AO that amount paid to Lalit Pai was without any business expediency is incorrect and without any basis. 2.5.4. In addition to the above, the learned AO has alleged that Mr. Bhavesh Acharya, an employee of the company was paid higher salary to compensate for losses incurred in investment made in the Appellant Company. The Appellant company had appointed Mr. Bhavesh Acharya as Senior Director - Project Solutions only on 4 August 2012 and hence, there was no increase in salary as compared to earlier year, as he was not at all employed in FY 2011-12. Hence, there is no question of any compensation being paid to him for loss in his investment value. Accor....
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....ai. It is evident from the same that all the employees/directors have paid taxes in the highest tax bracket of 30 percent. This substantiates that both Appellant company as well as its Directors and employees were assessed to tax at the highest rate of 30% and hence, this entire issue is revenue neutral In this regard, Appellant has submitted that the jurisdictional Hon'ble Gujarat High Court in the case of PWS Engineers Limited vs DCIT (Tax Appeal No. 209 of 2015) has held that where remuneration was taxed in the hands of director at the same rate at which it would have been taxed in the hands of the company, the same would be revenue neutral. Hence, disallowing the remuneration to be excessive in the hands of the company, would amount to double taxation which is not possible. Accordingly, Hon'ble High Court allowed the appeal of the company. 2.6. I have carefully considered the facts of the case, the assessment order and the written submissions of the Appellant. The Appellant has contended that it was incorporated only on 11 March 2011 and since AY 2012-13 was the first year of operation and accordingly, salary payments consisted of employees which were employed ....
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...., it is evident that he has rich qualification and experience. The amount paid to him was as per the employment contract and it is not open for the AO to question the commercial expediency of a businessman. 2.6.3. On a careful examination of the entire facts of the case, it is noted that the AO has nowhere disputed that the employees/directors have not rendered any services to the Appellant company. Hence, there is no dispute on factum of services rendered by Directors/employees. Further, the AO has not disallowed any expenses u/s 40A(2)(b) of the Act. It is a settled law that the reasonableness of employee expenses is not relevant to claiming deduction of expenses under section 37(1) of the IT Act. Additionally, the commercial expediency / business rationale of a particular expenditure incurred by an assessee for the smooth functioning and furtherance of its business is its prerogative and hence, the same cannot be questioned by the AO. Further, I find that in following judicial precedents, Hon'ble Supreme Court has specifically held that it is for the assessee to decide which expenditure has to be incurred in its business and the same cannot be decided by the AO. Sas....
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....l No. 209 of 2015) wherein it was held on grounds of revenue neutrality if once the income is being charged in the hands of the directors in the highest tax bracket, taxing the same in the hands of the company would amount to double taxation. Hence, based on the facts of the case and the various judicial precedents cited by the Appellant, I find that the AO was incorrect in disallowing employee benefit expenses amounting to Rs. 3,41,72,205/- and the same should be allowed u/s 37(1) of the Act. The A.O. is directed to give relief accordingly. The ground of the appeal is allowed." We find that the appellant justified that the turnover of the appellant has increased by an amount of Rs. 1,10,79,362/- over the previous year which has been verified from the financial statement by the Learned CIT(A). So far as the increase of the salary of the employees namely Himanshu Shah being the Chief Financial Officer, Mr. Suresh Ramu being the Chief Executive Officer the assessee has been able to show that both the employees were paid salary only for a part of F.Y. 2011-12 whereas they were employed for full part of F.Y. 2012-13. The payment made to Shri Lalti Pai to the tune of Rs. 65,00,000/- ....