2016 (8) TMI 1493 - AT - Income Tax

Disallowance genuine business expenditure in the form of director s salary - allowability of salary paid to the Director - HELD THAT - Since we have already concluded that the expenditure incurred by way of salary payments is allowable expenditure u/s 37(1) of the Act we do not find any necessity to adjudicate the said additional Ground. Conclude by holding that the material and evidence on record clearly suggests that services were rendered by Shri Faraz G. Joshi as Director of the assessee-company and that the salary paid to him cannot be disallowed. Therefore we set-aside the order of CIT(A) and direct the Assessing Officer to delete the addition. Thus the assessee succeeds on this aspect. Assessment u/s 153A - HELD THAT - A perusal of the assessment order as well as the order of CIT(A) reveals that the pleas of assessee have not been appreciated in its proper perspective. Notably CIT(A) in para 4.3 of his order has reproduced the submission of the assessee which was to the effect that such action of Assessing Officer was untenable in the impugned proceedings carried out u/s 143(3) r.w.s. 153A of the Act. The assessee has supported the said plea on the strength of an order passed by the Commissioner u/s 263 of the Act which was required to be given effect to by the Assessing Officer by amending the original assessment framed u/s 143(3) of the Act. We find that the aforesaid plea of assessee has been completely disregarded and action of the Assessing Officer has been upheld. After considering the factual matrix brought out by the assessee we find that the impugned action of Assessing Officer is unsustainable in the eyes of law and is hereby set-aside. Thus assessee succeeds in this Ground. Mis-declaration of PFAD as Acid Oil which has resulted in inflation of purchases - HELD THAT - The relevant discussion in the order of Assessing Officer as well as the CIT(A) clearly shows that the only basis for the impugned addition is the findings of DRI. There is no independent finding of the Assessing Officer on the basis of any material to say that assessee has inflated its purchases by declaring the import of PFAD as that of Acid Oil. In fact the order of CESTAT dated 4.12.2014 (supra) whose copy has been placed on record upholds the contention of assessee that it has imported Acid Oil and not PFAD. Quite clearly since the basis on which the addition made by the Assessing Officer itself does not remain the addition is directed to be deleted. Therefore on this aspect also assessee succeeds. Levy of penalty u/s 271(1)(c) - HELD THAT - Levy of penalty is unjustified. It would also not be out of place to mention here that once on the same issue the Assessing Officer did not initiate penalty at the time of making the disallowance in the course of original assessment proceedings u/s 143(3) of the Act then without there being any material found in the course of search repetition of the same disallowance in the proceedings u/s 143(3) r.w.s. 153A of the Act would not justify levy of penalty u/s 271(1)(c) - Thus on this aspect also we find no reason to uphold the penalty levied u/s 271(1)(c) - we set-aside the order of CIT(A) and direct the AO to delete the penalty imposed u/s 271(1)(c) of the Act. Accordingly appeal of the assessee is allowed.

Summary

Issues Involved:
1. Disallowance of Director's salary as a genuine business expense.
2. Exclusion of sales tax set-off while calculating deduction under section 10B.
3. Allegation of inflated purchases based on mis-declaration of imported goods.
4. Imposition of penalty under section 271(1)(c) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Director's Salary:
The primary issue in multiple assessment years (2002-03 to 2008-09) was the disallowance of salary paid to a Director, Shri Faraz G. Joshi, amounting to various sums across different years. The Assessing Officer (AO) disallowed the salary based on a statement made by the Director during a search operation, indicating he was not attending office nor assigned specific duties. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance. The Tribunal, however, found that the Director had been performing advisory roles and other responsibilities, and the salary payments had historically been allowed as business expenses. The Tribunal concluded that the salary payments were indeed for business purposes and directed the AO to delete the disallowance.

2. Exclusion of Sales Tax Set-off:
For the assessment year 2005-06, the AO excluded a sales tax set-off amount while calculating the deduction under section 10B, arguing it was not income derived from the industrial undertaking. The Tribunal found that this adjustment was beyond the scope of the assessment under section 153A, as it was not based on any incriminating material found during the search. The Tribunal set aside the AO's action, deeming it unsustainable.

3. Allegation of Inflated Purchases:
In the assessment year 2007-08, the AO added an amount for alleged inflated purchases based on a Directorate of Revenue Intelligence (DRI) report, which claimed the assessee mis-declared imported goods. The Tribunal noted that the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) had ruled in favor of the assessee, confirming the import was correctly declared. As the basis for the AO's addition did not hold, the Tribunal directed the deletion of the addition.

4. Imposition of Penalty under Section 271(1)(c):
The AO imposed a penalty for disallowances made in the assessment year 2004-05, specifically for Director's salary and fees paid to the Registrar of Companies (ROC). The Tribunal set aside the penalty related to the Director's salary since the addition itself was deleted. Regarding the ROC fees, the Tribunal found no justification for the penalty, as no new material was found during the search, and the original assessment had not initiated penalty proceedings for this issue. The Tribunal directed the deletion of the penalty.

Conclusion:
The Tribunal consistently found that the disallowances and penalties imposed by the AO were either not justified or beyond the scope of the assessments under section 153A. The Tribunal directed the deletion of all disallowances and penalties, allowing the appeals in favor of the assessee.