2017 (12) TMI 533 - AT - Income Tax

Addition on account of under invoicing - addition on the basis of email correspondence between the Director Mr. Pradeep Thampi and the customer - Held that - When the rates charged are competitive with the charges billed to other customers, there cannot be any inference that the books of accounts of the assessee need to be rejected. The rates quoted in the email can by no stretch of imagination be treated as the final bill, the receipt against which has been clandestinely received by the assessee. There is no mention of any incriminating cash, bank balance etc. found which can corroborate this hypothesis of the assessing officer. In the course of survey also it is not the case that Shri Pradeep Thampi had admitted that assessee company has received any clandestine amount. Thus, there is no case that any person had admitted the receipt of differential amount in the course of survey. The email conversation which has been explained to be a quotation, can by no stretch of imagination be treated as conclusive evidence that the assessee company has made under billing and received a sum of ₹ 42,89,213/- which has not been disclosed in the books of accounts. This fact is more accentuated when it is noted that the rates charged are competitive and no case has been made out that it is lower than any rate charged to other customers. Hence in the background of aforesaid discussion, we are of the considered opinion that this addition has been made dehors any cogent material and, hence, the same is not at all sustainable. Accordingly, we reverse the order of the authorities below on this issue and delete the addition in this regard. Disallowance of incentive payment - test of commercial expediency - expenditure wholly and exclusively laid out for the purpose of the business - Held that - For determining whether the expenditure was wholly and exclusively laid out for the purpose of the business the reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. Hence, torch bearer of the corporate governance mantle donned by the assessing officer is uncalled for and the disallowance is not sustainable on the facts and circumstances of this case. Another reasoning given by the assessing officer is that it is a repayment of capital contribution of ₹ 1 crore, on the basis of the statement of the said director. The ld. Commissioner of Income Tax (Appeals) has correctly held that this cannot be sustained as a capital contribution of Shri Pradip Thampi remains at ₹ 1 crore, at the end of the relevant assessment year. Hence, the view that the payment is reimbursement of capital is wholly unsustainable. Hence, in our considered opinion, there is no justification whatsoever in making the disallowance. Accordingly, in the background of the above discussion and precedent, in our considered opinion, there is no cogent basis for making the disallowance on the ground that it is a capital reimbursement and/or not commensurate with the services provided. Accordingly, we set aside the order s of the authorities below and delete the disallowance. Revenue appeal dismissed.

Summary

Issues Involved:
1. Under-invoicing of ?42,89,213.
2. Disallowance of incentive payment to the Managing Director.

Issue-wise Detailed Analysis:

1. Under-invoicing of ?42,89,213:

The assessee, engaged in the business of hiring charter planes and air taxis, was scrutinized following a survey action under section 133A. During the survey, documents were impounded, and a statement from the Managing Director (MD) was recorded. The Assessing Officer (AO) noted discrepancies between the invoiced amount for the South Africa Tour and the amount reflected in an email conversation. The AO inferred under-invoicing by ?42,89,213 and added this to the assessee's income, rejecting the books of accounts under section 145(3).

Upon appeal, the Commissioner of Income Tax (Appeals) upheld the AO's addition, noting that the MD's statement indicated the company was de facto owned by another individual and that the invoiced amount was less than the actual value of services rendered.

The Tribunal, however, found no cogent evidence of under-invoicing. It noted that the email conversation was merely a quotation and not conclusive evidence of actual billing. The Tribunal emphasized that no higher rates were charged to other customers and there was no evidence of any clandestine receipt of the differential amount. Therefore, the addition of ?42,89,213 was deleted, reversing the lower authorities' orders.

2. Disallowance of Incentive Payment to the Managing Director:

The AO disallowed the incentive payments of ?75,00,000 each for AY 2009-10 and 2010-11 to the MD, citing two main reasons: the payments were not justified by the services rendered, and they were considered reimbursement of share capital contributed by the MD. The AO noted a dip in the company's gross hire charges and questioned the justification for the high incentive payments, especially since no other employee received such an incentive.

The Commissioner of Income Tax (Appeals) partially upheld the AO's disallowance, reducing it to ?99 lakhs without providing a clear basis for this decision.

Upon further appeal, the Tribunal found the AO's reasoning unsustainable. It noted that the MD had provided extensive services, and the AO's judgment on managerial remuneration was not justified. The Tribunal referenced the Supreme Court's decision in Walchand and Co. (P.) Ltd., emphasizing that the reasonableness of expenditure should be judged from the businessman's perspective, not the Revenue's. The claim that the payments were reimbursements of share capital was also dismissed, as the capital contribution remained unchanged in the books.

Therefore, the Tribunal deleted the disallowance of the incentive payments, setting aside the orders of the lower authorities.

Conclusion:

The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, providing a detailed rationale for reversing the additions and disallowances made by the lower authorities. The judgment emphasized the importance of cogent evidence and the appropriate perspective in judging business expenditures.