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Advocates
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  • section 143(3) of the Income Tax Act, 1961 (hereinafter the Act). 2 ITA
  • COMPANIES ACT 1956
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Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
Acts
  • section 143(3) of the Income Tax Act, 1961 (hereinafter the Act). 2 ITA
  • COMPANIES ACT 1956
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Smart Summary

Tribunal Summary — ITA Nos. 2360/Mum/2017 (Order dated 28-09-2018)

Factual and Procedural Background

This appeal arises from the order of the Commissioner of Income Tax (Appeals)-2, Mumbai (CIT(A)) in appeal No. CIT(A)-2/IT/44/2014-15 dated 17.01.2017. The assessment for Assessment Year (AY) 2011-12 was framed by the Dy. Commissioner of Income Tax, Circle-1(1), Mumbai (DCIT/AO) by an order dated 25.03.2014 under section 143(3) of the Income Tax Act, 1961.

The assessee appealed to the CIT(A) against two disallowances made by the AO: (1) disallowance of professional fees of Rs. 62,500 as a prior period expenditure, and (2) partial disallowance of directors' remuneration amounting to Rs. 8,41,528 under section 40A(2) of the Act. CIT(A) confirmed the AO's actions on both issues, and the assessee brought the present second appeal before the Income Tax Appellate Tribunal (ITAT).

The Tribunal pronounced its order in open court on 28-09-2018 and allowed the assessee's appeal in its entirety. Copies of the order were directed to the appellant, the respondent, the CIT(A), the CIT, the DR, ITAT Mumbai, and the guard file.

Legal Issues Presented

  1. Whether the CIT(A) erred in confirming the disallowance of professional fees of Rs. 62,500 as a prior period expenditure (claimed in AY 2012-13 but alleged to relate to an earlier period)?
  2. Whether the CIT(A) erred in confirming disallowance of directors' remuneration to the extent of Rs. 8,41,528 under section 40A(2) of the Income Tax Act on grounds that the payment exceeded limits under the Companies Act and lacked Central Government approval?

Arguments of the Parties

Appellant's (Assessee's) Arguments

  • On the professional-fee issue: The counsel explained that the advocate/solicitor raised a consolidated invoice (dated in July 2011) for professional charges covering the period 01.01.2010 to 31.03.2011 for a total of Rs. 3,12,501. The assessee booked the invoice on 31.03.2011 in its books. Although Rs. 62,500 related to the period 01.01.2010 to 31.03.2010 (a prior year), the liability crystallized only when the consolidated bill was raised in July 2011 (FY 2010-11 relevant to AY 2011-12). Therefore, the assessee contended the expense was to be treated as a current-year charge and allowable in AY 2011-12.
  • On the directors' remuneration issue: The assessee submitted that the managing director (Shri G.N. Guruprasad) held no equity shares and was taxed at a higher individual slab; the company incurred substantial losses. Counsel relied on CBDT Circular No. 6P dated 6 July 1968 to contend that s.40A(2) is intended to check evasion of tax and should not be applied to bona fide cases; that disallowance under s.40A(2) requires consideration of the fair market value of services; and that the remuneration was reasonable given the director's qualifications, long experience in the textile industry, and the company's increased turnover (from Rs. 99 lakhs to Rs. 283 lakhs). Counsel also referred to Ministry of Corporate Affairs notification G.S.R. No. 70 dated 8 Feb 2011 (amending Schedule XIII, Companies Act 1956) which, according to the assessee, removes the requirement of Central Government approval for managerial remuneration in unlisted companies having no or inadequate profits if other conditions are satisfied.

Respondent's (Revenue's) Arguments

  • On the professional-fee issue: The Revenue (through the AO) treated the amount as relating to an earlier period (AY 2010-11) and disallowed it as a prior period expenditure. The Sr. Departmental Representative before the Tribunal supported the AO's and CIT(A)'s orders.
  • On the directors' remuneration issue: The AO disallowed Rs. 8,41,528 invoking section 40A(2) on the ground that the remuneration paid exceeded limits prescribed under the Companies Act, 1956, and that no Central Government approval was obtained. The AO also noted that the remuneration paid in the immediate preceding year was Rs. 17,04,204 as against Rs. 32,41,528 in the relevant year, treating the increase as excessive. The Sr. Departmental Representative did not contradict the factual aspects relied upon by the assessee but supported the disallowance in assessment and CIT(A)'s confirmation.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Tribunal considered the evidence, invoices, the timing of the liability, and the submissions of both parties for each issue and applied the statutory framework as presented in the record.

Analysis — Professional Fees (Rs. 62,500)

  • The Tribunal noted the factual position that the advocate/solicitor raised a consolidated bill in July 2011 (two slightly different dates appear in the record: 20.07.2011 and 21.07.2011) charging for the period 01.01.2010 to 31.03.2011 for Rs. 3,12,501, and that the assessee recorded this invoice in its books as on 31.03.2011.
  • Although Rs. 62,500 pertained to services rendered during 01.01.2010 to 31.03.2010 (relevant to AY 2010-11), the Tribunal emphasized that the liability "crystallized" only when the consolidated bill was raised in July 2011, i.e., during FY 2010-11 relevant to AY 2011-12.
  • The Tribunal further observed that the AO had never doubted the genuineness of the expenditure. Taking these facts together, the Tribunal concluded that the expense was properly claimed in AY 2011-12 because the liability arose (crystallized) in that year when the invoice was issued and the bill was paid/recognized in the assessee's books.
  • Accordingly, the Tribunal allowed the claim and set aside the orders of the lower authorities on this point.

Analysis — Directors' Remuneration (Rs. 8,41,528)

  • The Tribunal recited the AO's position that the assessee paid Rs. 32,41,528 as remuneration to its managing director (Shri G.N. Guruprasad), and that part (Rs. 8,41,528) was disallowed under section 40A(2) because the payment allegedly exceeded the Companies Act prescribed limits and no Central Government approval had been obtained.
  • The Tribunal noted facts presented by the assessee: the company is an unlisted closely held public company and a 99.99% subsidiary of Beginninger AG (Swiss company); the managing director held no equity; the company had substantial losses; the director's remuneration reflected his qualifications and long experience; and the company's turnover had increased markedly in the relevant year.
  • The assessee relied on CBDT Circular No. 6P dated 6 July 1968 to argue that section 40A(2) targets tax evasion via excessive payments and should not be applied to bona fide cases. The Tribunal also noted the assessee's reliance on the Ministry of Corporate Affairs' notification G.S.R. No. 70 dated 8 February 2011, which amended Schedule XIII of the Companies Act, 1956 so that unlisted companies with no or inadequate profits may not require Government approval for managerial remuneration provided other conditions in the Schedule are met.
  • On these facts, and after hearing rival contentions, the Tribunal found that there was no evidence of tax evasion and that the managerial remuneration was reasonable. The Tribunal specifically observed that, in light of the statutory and regulatory position for unlisted companies (as reflected in the cited notification), no Central Government approval was required for the payment of higher remuneration in the circumstances of this case.
  • Accordingly, the Tribunal held the disallowance under section 40A(2) was not warranted and allowed the remuneration claim, reversing the orders of the AO and CIT(A).

Holding and Implications

Core Ruling: The appeal of the assessee is allowed.

Direct Effects and Orders:

  • The Tribunal allowed the assessee's claim of professional fees of Rs. 62,500 for AY 2011-12, holding that the liability crystallized when the consolidated invoice was raised in July 2011 and that the AO had not doubted the genuineness of the expense. The orders of the lower authorities on this point were set aside.
  • The Tribunal allowed the claim for the full managers' remuneration (removing the disallowance of Rs. 8,41,528), concluding there was no tax evasion, the remuneration was reasonable, and that Central Government approval was not required for the unlisted company in the facts before the Tribunal. Orders of the lower authorities on this point were reversed.

Broader implications: The opinion does not purport to lay down a new precedent. It resolves the statutory and factual issues as applied to the assessee's case and reverses the assessment- and appellate-authority orders accordingly. The order was pronounced in open court on 28-09-2018.

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    BENNINGER INDIA P. LTD, MUMBAI v. DCIT 1(1), MUMBAI

    PER MAHAVIR SINGH, JM: This appeal of the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-2, Mumbai [in short CIT(A)], in appeal No. CIT(A)-2/IT/44/2014-15, dated 17.01.2017. The Assessment was framed by the Dy. Commissioner of Income Tax, Circle-1(1), Mumbai (in short DCIT/ AO) for the A.Y. 2011-12 vide order dated 25.03.2014 under section 143(3) of the Income Tax Act, 1961 (hereinafter the Act). ITA Nos. 2360/Mum/2017

    2. The first issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in disallowing the professional fee of 62,500/- considering the same as prior period expenditure. For this assessee has raised the following ground No. 1: -

    1. On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) has erred in confirming disallowance of professional fees of Rs 62,500/- as a prior period expenditure.

    3. Briefly stated facts relating to this issue are that the assessee has claimed expenses in the profit and loss account on account of legal expenses. The AO noticed that this amount pertains to earlier period i.e. for AY 2011-12 and not for the relevant AY 2012-13. Accordingly, the AO disallowed the expenses and added back to the returned income of the assessee. Aggrieved, assessee preferred the appeal before CIT(A), who further held that the invoice relates to January 2010 to March 2010 i.e. relating to FY 2009-10 relevant to AY 2010-11 and furthermore, it was observed that the expenditure can be treated as capital in nature and hence directed the AO to allow depreciation as per law. Aggrieved, now assessee is in second appeal before Tribunal.

    4. We have heard the rival contentions and gone through the facts and circumstances of the case. Before us, the learned Counsel for the assessee explained that these payments relates to legal and professional charges paid to advocate and solicitors for the period of January 2010 to March 2010. It was explained that the concerned advocate/solicitor raised the invoice on 20th July 2011 for a total sum of 3,12,501/- towards professional fee for the period 01.01.2010 to 31.03.2011, which was received by the assessee in the month of July 2011 itself. It was claimed ITA Nos. 2360/Mum/2017 that the assessee booked the said invoice as on 31.03.2011 in its book of accounts. Although, the professional fee for the sum of 62,500/- pertains to the period 01.01.2010 to 31.03.2010 i.e. prior year charges but the said amount included in the current years invoice and even this came to the knowledge of the assessee on payment of the said bill which arose during the FY 2010-11 relevant to AY 2011-12. It was claimed that the payment of the said liability crystalised during the year 2011-12 itself and hence, this expense for practical purposes is to be considered as current year charge and hence, it should be allowed. The learned Sr. Departmental Representative, only supported the assessment order and the order of CIT(A).

    5. Before us, the assessee relied on the bill raised by advocate and solicitor Shri T. Pooran, wherein professional charges from 01.01.2010 to 31.03.2011 was charged by a consolidated bill dated 21.07.2011 for an amount of 3,12,501/-. There is no dispute in the facts that the amount of 62,500/- pertains to the period of 01.01.2010 to 31.03.2010 relevant to AY 2010-11 i.e. prior period. But it is to be noted that the liability for this demand has been crystalized only on raising of bills by the concerned advocate cum solicitor vide bill dated 21.07.2011. Hence, we are of the view that these expenses are to be allowed because as the AO has never doubted the genuineness of the expenses. As the liability has been crystalized during the AY 2011-12 and assessee has rightly claimed the same. We allow the claim of the assessee and set aside the orders of the lower authorities. This issue of the assessees appeal is allowed.

    6. The next issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of remuneration paid to director to the extent of 8,41,528/-. For this assessee has raised the following ground No. 2: - ITA Nos. 2360/Mum/2017

    2. On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) has erred in confirming disallowance of directors remuneration to the extent of Rs 8,41,528/-.

    7. Briefly stated facts are that the assessee company paid a sum of 32,41,528/- being remuneration to its managing director Shri G.N. Guruprasad. The assessee is unlisted closely held company and it was 99.99% subsidiary of M/s Beginninger AG a Swiss Company. The Managing director of the assessee is a professional director but does not hold any equity/share capital of the assessee. The assessee company claimed as deduction of remuneration paid to the Managing Director but the AO while framing the assessment disallowed part of the remuneration of 8,41,528/- by invoking the provisions of section 40A(2) of the Act by stating that the payment made was excessive of the limits prescribed under companies Act 1956 and hence, it was in violation of Company Law as no permission was obtained from the Central Government. Further, the remuneration paid during the immediate preceding assessment year was an amount of 17,04,204/- as against remunerations paid during the current assessment year i.e. 32,41,528/-. Accordingly, the AO disallowed the part of remuneration of 8,41,528/- by invoking the provisions of section 40A(2) of the Act. Aggrieved, assessee preferred the appeal before CIT(A), who also confirmed the action of the Assessing Officer. Aggrieved now assessee is in second appeal before Tribunal.

    8. Before us, the learned Counsel for the assessee submitted that the managing director Shri G.N. Guruprasad does not held any equity shares in the assessee company and hence assessee is being taxed under the ITA Nos. 2360/Mum/2017 highest slab rate. It was also claimed that the assessee company was not liable for tax due to substantial losses year to year. According to the learned Counsel there is no scope evasion of tax and in term of CBDT Circular No. 6P dated 6th July 1968 explaining the pre-requisites invoking the provisions of section 40A(2) of the Act are missing. The relevant circular states that it should be borne in mind that the provision is meant to check evasion of tax through excessive or unreasonable payments to relatives and associate concerns and should not be applied in a manner which will cause hardship in bonafide cases. Further, the learned Counsel for the assessee stated that on plain reading of section 4A(2) of the Act, it is clear that the disallowance can be made only and only after considering the fair market value of goods and services or facilities for which payment is made. Further, these expenses are for legitimate business need of the assessee and assessee has derived benefit by incurring these payments. For this the learned Counsel for the assessee also stated that the managing Director is B Tech Graduate in Textile Chemistry from Mumbai University, Department of Chemical Technology and passed out in 1985 and joined Century Spinning and manufacturing cotton mills as management trainee. It was stated that the managing director was paid remuneration based on qualification, long standing experience in textile industry as per industry norms. It was explained that the assessee filed a detail note on the background and achievements of the managing Director in the Textile field. Further, the remuneration paid to managing director in the previous year cannot be a criterion for invoking the provisions of section 40A(2) of the Act as the assessees turnover stood at 283 lakhs as compared to 99 lakhs in immediately previous year. This has resulted into rise of 185% in turnover. The learned Counsel for the assessee also explained that in view of notification G.S. R No. 70 dated 8th February 2011 issued by the Ministry ITA Nos. 2360/Mum/2017 of Corporate Affairs, Government of India, Unlisted Public Limited companies are not required to obtain any permission where the remuneration of Directors exceeds limits in cases where they have no or inadequate profits relevant extract of the aforesaid notification dated 8th February 2011 is reproduced below: -

    2. The primary purpose of regulations over managerial remuneration is to protect stakeholders. particularly shareholders and creditors. Unlisted companies are in several respects similar to private limited companies. A substantial number of the applications coming to the Ministry fall under this category and the Ministry s limited manpower is disproportionately involved is, this exercise. In the case of unlisted companies so long as the conditions specified in Schedule XIII. including special resolution of shareholders and absence of default on payment to creditors, are fulfilled approval will not be needed hereafter.

    3. Accordingly, Schedule XIII of the companies Act 1956 is being amended to provide that unlisted companies (which are not subsidiaries of listed companies) shall not require Government approval for managerial remuneration in cases where they have no profits/ inadequate profits, provided they meet the other conditions stipulated in the Schedule. None of the above factual aspect was contradicted by the learned Sr. Departmental Representative. ITA Nos. 2360/Mum/2017

    9. After hearing rival contentions and going through the facts and circumstances of the case narrated in detail above, we are of the view that there is no tax evasion and there is reasonableness of managerial remuneration. Now no approval is required from the Central Government for making payment of higher remuneration even in case of loss in the case of unlisted public company. In view of these facts, we are of the view that this is allowable expenditure and we allow the same accordingly. Orders of the lower authorities are reversed and this issue of assessees appeal is allowed.

    10. In the result, the appeal of assessee is allowed. Order pronounced in the open court on 28-09-2018. Sd/- Sd/- ( / RAMIT KOCHAR) ( /MAHAVIR SINGH) ( / ACCOUNTANT MEMBER) ( / JUDICIAL MEMBER) , / Mumbai, Dated: 28-09-2018 , . / Sudip Sarkar, Sr.PS ITA Nos. 2360/Mum/2017 /Copy of the Order forwarded to :

    1. / The Appellant

    2. / The Respondent.

    3. () / The CIT(A)

    4. / CIT

    5. , , / DR, ITAT, Mumbai

    6. / Guard file. / BY ORDER, //True Copy// / (Asstt. Registrar) , / ITAT, Mumbai

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    Comments

    BENNINGER INDIA P. LTD, MUMBAI v. DCIT 1(1), MUMBAI
    (Sep 28, 2018)