THE issues before the Bench are - Whether any disallowance u/s
40A(2) is warranted even the assessee proves the higher payment of salary to one
of its key employees running critical business operations; Whether such
disallowance can be made even if it is pointed out that the individual assessee
has paid higher taxes on such income in its individual return of income; Whether
payments made to sub contractors by way of account payee cheques, can be
disallowed merely on the basis that the amount is excessive and Whether amount
disallowed after considering all the material facts and circumstances by the
Tribunal, can be altered by the High
Court without any cogent basis. And the
verdict goes against the Revenue.
Facts of the
case
The assessee, a limited company, is
mainly engaged in the business of contract and working for National Highway
Authority of India on contract basis and the assessee gets work order after
submission of tenders. It was claimed by the assessee that it was maintaining
regular and proper books of accounts supported by material and relevant records
and accounts were also audited by a CA. During assessment, AO desired the
assessee to explain the nature and source of payment debited on account of job
work charges to the extent of Rs.2,51,80,655/- and particularly of three
sub-contractors to whom substantial payments had been made. Assessee had claimed
an expenditure of Rs.50,18,663/- under the head of Soil testing and surveying
expenses and with reference to the same as well, further evidence was desired by
the AO. There was a third claim with reference to the remuneration to an
employee, who was Chairman-cum-MD of the assessee company to whom salary of
Rs.24 lac was paid and according to the AO, the payment was excessive. The
assessee had submitted that he does not maintain books of accounts but he had
worked for the assessee company and had filed return u/s 44AF. However, the AO,
in view of the statement recorded, was of the view that the employee was not
aware as to what amount he received from the assessee as also the payments made
by him to his labourers. Finding discrepancies, the AO was not satisfied with
the explanation so offered. After holding that out of the three above
sub-contractors, since two had filed return of income on the presumptive basis
u/s 44AD, they do not maintain regular books of accounts and the third one has
paid tax of Rs.354/- only and accordingly disallowed the amount of
Rs.12,59,033/- at the rate of 5% out of the total job charges on an
estimate/adhoc basis. In so far as the Soil testing and surveying expenses, AO
held that the expenditure was disproportionate in proportion to the income
received by way of Soil testing and surveying expenses and therefore, made an
adhoc addition of 10% and disallowed the amount of Rs.5,01,866/-. In so far as
the salary paid to Shri Viswas Jain was concerned, amount of Rs. 9 lac was
disallowed on the premise that the said amount was excessive considering Sec
40A(2)(a) as salary paid to Shri Viswas Jain was Rs. 3 lac in the AY 2002-03
which was increased to Rs.12 lac in the AY 2003-04 and abruptly increased by
double to Rs.24 lac during the previous year relevant to the year under appeal
when the AO observed that there was no major change of duties and
responsibility. It was further observed that one Alam Singh, who was a technical
person, being Engineer and Professor in the field of Civil Engineering, was paid
highest amount of Rs.2,40,000/- and therefore feeling that the salary paid was
disproportionate, held that the salary of Rs.15 lac was reasonable and
disallowed Rs.9 lacs.
On
appeal before CIT(A), assessee had submitted a detailed explanation stating that
the results have been fair and reasonable and there was overall growth in the
receipts and when receipts were substantially better, the consequential
expenditure had also to be incurred. It was contended that all the expenses paid
to the sub-contractors were by account payee cheques and they were being
assessed to IT Act and even tax deduction at source was made from their
respective payment as subcontractorship and it was none of the duty of the
assessee to find out whether they are filing returns under presumptive scheme or
otherwise. With reference to other disallowances also, the CIT(A), after
considering the arguments advanced by the assessee, deleted the dis allowances
on all the three counts. On further appeal by the Revenue, Tribunal upheld the
deletion of the disallowances and dismissed the appeal filed by the
revenue.
Before HC, the Revenue's counsel
had submitted
that the AO had correctly disallowed all the three expenses out of the aforesaid
expenses as the claim was abnormal and the respondent-assessee was unable to
lead further evidence and to justify that the expenditures were incurred to a
large extent. He contended that merely because those sub-contractors are filing
some return, that does not mean that any amount of payment can be made and
allowed. He contended that it was the duty of the respondent-assessee to show
the justification of payment of huge amounts to the respective sub-contractors
which ranged from Rs. 16 lac to Rs.27 lac. He further contended that there was
no justification for claiming abnormal amount on account of Soil testing and
surveying expenses as also as to why the salary to the tune of Rs.24 lac was
paid to Shri Viswas Jain, who happens to be Chairman-cum-Managing Director of
the respondent-company itself and therefore, he was the sole person to take
whatever the salary he wanted and this is not fair and proper. He contended that
just in three years, the salary has been increased from Rs. 3 lac to Rs.24 lac
and therefore, increase by 8 times was not proper. He contended that the AO had
himself allowed an increase of 5 times i.e. 15 lac and considered the same as
reasonable and therefore, the salary over and above Rs.15 lac was correctly
disallowed. He contended that substantial question of law arises out of the
order of the ITAT and needs consideration by this Court. On the other hand, the assessee's
counsel had contended that it was basically a finding of fact, not only by the
ITAT but also the CIT(A), who, after appreciation of evidence and material on
record, deleted the additions which had no basis. It was contended that the
estimated disallowances could not have been made without specific defects and
when all round performance was better and when both the appellate authorities
have found, as a finding of fact, that the receipts had sharply increased in
comparison to the stated expenditures, then no disallowance was required to be
made and fully supported the order of the ITAT and submitted that no question of
law arise out of the order of the ITAT.
Held
that,
++ in
so far as the payments to sub-contractors are concerned, it is noticed that all
the payments are by account payee cheques and the work, which the assessee is
doing, certainly required sub-contractorship to look into various other jobs
which possibly the assessee was unable to handle on its own. Admittedly, Shri
Bhura Ram Chaudhary appeared before the AO, accepted that he has worked for the
assessee and had also received payments from the said concern. One may not
remember after lapse of years as to exact amount having been received from a
particular concern and therefore, to say that there was discrepancy in the
statements of Shri Bhura Ram Chaudhary is not proper. He had already conveyed
that he had filed his return u/s 44AF (should be 44AD as he was not aware of the
provisions of law) but did not maintain the books of accounts which, in-fact, is
not required to be maintained in a case of presumptive taxation. He has already
conveyed that he had taken 25 people for working for the assessee and used to
take 10 to 12 persons as and when required and that the tax was also deducted at
source. In so far as the Payal Builders and Consultants & Gautam Builders
& Consultants, both have admitted that they have received amount from the
assessee for the work done by them and tax has also been deducted in their
respective cases. It may be that these are small time persons and as required
under the IT Act u/s 44AD, they were filing return and therefore, not required
to maintain regular and proper books of accounts and if adverse inference is
drawn by the AO on account of this fact, in our view, is not proper. It is also
an admitted fact, as observed by the CIT(A) as well as the ITAT that income from
DPR work had increased by 21.35% over preceding year whereas the corresponding
expenditure is only 17.19%. We also observe that while the payment to the three
subcontractors totaled Rs.60,09,550/- whereas the AO, for no reason, disallowed
5% out of the total job work charges paid amounting to Rs.2,51,80,655/- and this
exercise of the AO appears without any justification and was not proper. When
all the three recipients did claim that they have received the amount for the
work done on behalf of the assessee, then by and large there was no occasion for
the AO to disallow the same and if or any reason the AO was not satisfied with
reference to the income shown by the recipients in their respective hands,
adverse inference at least could not have been made in the hands of the assessee
and if at all then, the AO, assessing the assessee ought to have forwarded such
information to the AO, assessing those recipients and action, if deemed proper,
could have been taken in their respective hands rather than observing here in
the case of the assessee that the sub-contractors have not shown proper income
or the income is disproportionate to the receipts. Therefore, we feel that such
an observation and ultimate conclusion by the AO to disallow the adhoc amount
was not correct and rightly accepted by both the appellate
authorities;
++ in
so far as the disallowance out of the Soil testing and surveying expenses is
concerned, both the ITAT as well as CIT(A) have correctly disallowed the
deletion and there was no occasion for any adhoc disallowance out of the said
expenditure at the rate of 10%. The CIT(A) so also the ITAT had considered the
matter after analyzing the details submitted before them and it has been
observed by the CIT (A) and approved by the ITAT that the receipts by the
assessee were to the extent of Rs.85,75,162/- as against the expenditure of
Rs.50,18,663/-. Therefore, even the receipts are substantially higher than the
expenditure and in our view, the disallowance deleted by the CIT(A) and approved
by the ITAT cannot be faulted with. In so far as the salary/remuneration to the
Chairmancum- Managing Director Shri Viswas Jain to the extent of Rs.24 lac is
concerned, in our view, it is for an assessee, a businessman, who happens to be
well versed in running business/profession to come to a conclusion as to what
remuneration/salary is to be paid to an employee and in our view, reasonableness
is to be judged from the angle of a businessman rather than from the angle of
the AO who may not be aware of the realities and peculiarities of business. It
has already been explained on the assessment records that the reasonableness or
the justification of paying salary to the tune of Rs.24 lac to Shri Viswas Jain
was highest as he was the sole person who was influential in getting business
for the assessee-company. It is already observed in the assessment record that
the receipts of the assessee had increased from 7.73 crores in the AY 2003-04 to
9.92 crores during the previous year relevant to the year under appeal due to
competence of Shri Viswas Jain whereas the salary has been increased from 12 lac
to 24 lac during the previous year under appeal. Not only this, it is a case of
a limited company and the said remuneration/increase in the remuneration was
approved after passing a proper resolution in an extra-ordinary general meeting
of the shareholders u/s 269 of the Companies Act. The minutes of the said
meeting where all the directors were present had also been produced before the
lower authorities. It is already on record that it was on account of Shri Viswas
Jain who happens to be the key person of the Company and whole time Director and
who had converted his proprietorship concern into a limited company from the AY
2003 and when he has been proved to be an asset for the company, in our view,
the CIT(A) rightly deleted the said disallowance which was upheld by the ITAT
and we also see no reason in interfering with the same. In our view, on the face
of overwhelming evidence on record, salary of Rs.24 lac cannot be said to be
excessive or unreasonable and the revenue has not been able to make out as to
whether the salary paid to Shri Viswas Jain was not as per the fair market value
as provided u/s 40A(2)(a) and 40A(2)(b);
++
certainly, aforesaid section provides that the AO, if he is of the opinion that
such expenditure is excessive or unreasonable, having regard to the legitimate
business needs of the company and the benefit derived by assessee, is not
proper, has a chance to disallow any amount over and above which he feels
appropriate but the opinion should be formed objectively from the point of view
of a prudent businessman and after taking into account the statutory criteria
and all relevant circumstances and should not be influenced by immaterial
considerations. Therefore, the AO, in our view, has been influenced by
extraneous considerations and has not properly appreciated the involvement of
Shri Viswas Jain in leading a limited company of having substantial increase in
receipts and overall results since the limited company was formed. Not only
that, we also notice that the assessee-company as well as the salary paid to
Shri Viswas Jain has offered to tax at maximum rate in his individual capacity
and therefore, it can be said that there is hardly any loss to the revenue in so
far as the payment of salary is concerned. We have observed this only by way of
an observation, otherwise, as observed herein above, the reasonableness has to
be considered from the angle of a businessman and the assessee, who happens to
be a businessman, certainly did consider that salary of Rs.24 lac to Shri Visvas
Jain was fair and reasonable and after getting it approved, as observed herein
above, in the extraordinary general meeting of the company. In view of what we
have discussed herein above, on all the three issues, the ITAT, after
appreciation of evidence, has come to the conclusion that the disallowance out
of job work charges, soil testing and surveying charges and directors'
remuneration is not proper and it had been rightly deleted by the CIT(A) and we
do not find any infirmity or perversity in the said order of the ITAT. It is
purely a finding of fact and no question of law much less substantial question
of law can be said to emerge out of the said order of the ITAT so as to call for
any interference of this Court. In our view, no substantial question of law
arises out of the order passed by the ITAT. Consequently, the appeal, being
devoid of merit, is hereby dismissed in limine. No order as to costs.
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