2019 (10) TMI 1024 - AT - Income Tax

Deduction of expenses u/s 37(1) - employee s benefit expense - sharp increase in salary expenses as compared to the turnover - HELD THAT - Appellant justified that the turnover of the appellant has increased by an amount of ₹ 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 ₹ 65,00,000/- has also been justified by the assessee taking into consideration his academic background and immense experience in this field. The payment made to Bhavesh Acharay having 19 years of experience in clinical data management and 4 years in site management was also explained by the assessee relying upon his rich qualifications and experience. All this doubts/points raised by the Learned AO were carefully considered by the Learned CIT(A) while deleting addition made by AO. We have also carefully considered the judgment relied upon by the Learned AR. We find from the judgment passed by the Hon ble Apex Court in the matter of Sassoon J. David and Co (P) Ltd.-vs-CIT 1979 (5) TMI 3 - SUPREME COURT that reasonableness of employee s expenses is not relevant to claiming deduction of expenses under section 37(1) of the Act. Additionally commercial expediency/business rational of a particular expenditure incurred by an assessee for the smooth running and furtherance of its business is its prerogative and hence the same cannot be questioned by the Revenue. The question regarding tax revenue neutrality on the fact that if the income is being charged in the hands of the directors in the highest rate bracket taxing the same in the hands of the company would amount to double taxation as has been decided in the judgment of PWS Engineers Ltd.-vs-DCIT 2016 (6) TMI 596 - GUJARAT HIGH COURT has been duly taken care of by the first appellate authority. Hence taking into consideration the entire aspect of the matter, we find no infirmity in the order passed by the Learned CIT(A) in deleting the addition applying the ratio laid down by the Juridical pronouncement as mentioned above so as to warrant interference. Thus, the question is accordingly answered in the affirmative i.e. in favour of the assessee

Issues Involved:
1. Disallowance of employee benefit expenses.
2. Increase in salary expenses without corresponding increase in turnover.
3. Justification of salary increments and bonuses paid to specific employees and directors.
4. Commercial expediency and business rationale of the expenses.
5. Revenue neutrality and potential double taxation.

Detailed Analysis:

1. Disallowance of Employee Benefit Expenses:
The Revenue's appeal was against the deletion of ?3,41,72,205/- disallowed by the Assessing Officer (AO) as employee benefit expenses. The AO had disallowed these expenses due to a sharp increase in salary expenses compared to the previous year without a corresponding increase in turnover. The Commissioner of Income Tax (Appeals) [CIT(A)] had deleted this addition, and the Revenue challenged this decision.

2. Increase in Salary Expenses Without Corresponding Increase in Turnover:
The AO observed that the assessee's salary expenses for AY 2013-14 were ?6,25,64,280/- compared to ?2,83,92,075/- in the previous year, noting no substantial increase in turnover. The AO believed the increase in salary was unjustified, particularly focusing on the remuneration of directors and certain employees.

The CIT(A) noted that the assessee company was incorporated on 11 March 2011, making FY 2011-12 its first year of operation. Consequently, many employees were employed only part of the year, leading to lower salary expenses. In FY 2012-13, these employees were employed for the full year, resulting in higher salary expenses. The CIT(A) found that the actual salary expenses for FY 2012-13 were lower when annualized compared to FY 2011-12, thus refuting the AO's claim of unjustified salary increases.

3. Justification of Salary Increments and Bonuses:
The AO questioned the salary increments of directors Himanshu Shah and Suresh Ramu, and the bonus paid to Lalit Pai. The CIT(A) found that both directors were employed only part of FY 2011-12 and for the full year in FY 2012-13, justifying the salary increase. Lalit Pai's bonus was supported by his qualifications and experience, and his employment contract.

The AO also alleged that Bhavesh Acharya was paid higher to compensate for investment losses in the company. The CIT(A) found this claim baseless as Acharya was employed only from 4 August 2012, with no salary comparison possible with the previous year.

4. Commercial Expediency and Business Rationale:
The CIT(A) emphasized that the reasonableness of employee expenses is not relevant for claiming deductions under section 37(1) of the Income Tax Act. The commercial expediency of expenditures is the prerogative of the business, and such decisions cannot be questioned by the AO. This principle was supported by the Supreme Court rulings in Sassoon J. David and Co (P) Ltd v CIT and CIT v Malayalam Plantations Ltd, which state that expenditures incurred voluntarily for promoting business and earning profits are deductible, even without a compelling necessity.

5. Revenue Neutrality and Potential Double Taxation:
The CIT(A) noted that the directors and employees who received the increased salaries were taxed at the highest tax bracket of 30%, making the issue revenue neutral. This was supported by the Gujarat High Court ruling in PWS Engineers Limited vs. DCIT, which held that taxing the same income in the hands of both the company and its directors would amount to double taxation.

Conclusion:
The CIT(A) deleted the disallowance of ?3,41,72,205/- based on the justifications provided by the assessee, the commercial expediency of the expenses, and the revenue neutrality of the situation. The tribunal upheld the CIT(A)'s decision, finding no infirmity in the order and dismissing the Revenue's appeal. The tribunal emphasized that the AO should not question the commercial decisions of the assessee and that the expenses were incurred wholly and exclusively for business purposes. Consequently, the appeal was dismissed, and the CIT(A)'s order was affirmed.

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