2020 (3) TMI 553 - HC - Income Tax

Disallowance of payments made to Shri Faraz G. Joshi in the form of salary / perquisites - allowable revenue expense u/s 37(1) - HELD THAT - Supreme Court in the case of Sassoon J. David Co. Pvt. Ltd. Vs. CIT 1979 (5) TMI 3 - SUPREME COURT examined the expression wholly and exclusively appearing in Section 10(2)(xv) of the Income Tax Act, 1922 which corresponds to Section 37 of the Act. Sub-section (1) of Section 37 says that any expenditure not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession . It was observed that the expression wholly and exclusively appearing in the said section does not mean necessarily . Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity. If it is incurred for promoting the business and to earn profits, the assessee can claim deduction under Section 10(2)(xv) even though there was no compelling necessity to incur such expenditure. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under Section 10(2)(xv) of the Act. We do not find that question Nos.1 to 4 as proposed by the Revenue raise any substantial question for consideration of the Court. Addition made in pursuant to the report of the DRI after recording that the report has been quashed by Customs, Excise Service Tax Appellate Tribunal (CESTAT) - Whether Tribunal is justified in deleting the addition made in pursuant to the findings provided by DRI, a Government Agency on the ground that assessing officer did not conduct any independent enquiry and only relied upon the finding of DRI, ignoring that DRI is a Government Agency and the information provided by it can be fully relied upon? - HELD THAT - We find that Tribunal relied upon the order of the Customs, Excise Service Tax Appellate Tribunal (CESTAT) in the assessee s own case and deleted the additions made by the assessing officer. We have been informed that Commissioner of Customs has assailed the finding returned by the CESTAT before the High Court of Gujarat and by order dated 16.02.2017, the High Court of Gujarat has admitted the said tax appeal on the substantial questions of law framed thereunder - consequently, we admit this appeal on question Nos.5 and 6 above.

Summary

Issues:
1. Disallowance of remuneration paid to the Director under Section 37(1) of the Income Tax Act.
2. Allowability of Director's remuneration based on consultation and advisory services.
3. Disallowance of Director's remuneration under Section 153-A of the Act.
4. Reliance on findings of DRI for addition made in the assessment.
5. Deletion of additions based on CESTAT's order and pending appeal before the High Court of Gujarat.

Analysis:

Issue 1: Disallowance of remuneration paid to the Director under Section 37(1) of the Income Tax Act:
The assessing officer disallowed the salary/perquisites paid to the Director, citing lack of evidence of services rendered. The first appellate authority upheld this decision. However, the Tribunal found the Director's explanation reasonable, considering his long-standing position and involvement in consultation. The Tribunal observed that salary payments were consistently allowed in previous assessments. The Tribunal set aside the assessing officer's decision, emphasizing the Director's role and the absence of adverse implications.

Issue 2: Allowability of Director's remuneration based on consultation and advisory services:
The Tribunal referred to the Supreme Court judgment on expenditure incurred for business purposes. It highlighted that the expression "wholly and exclusively" in Section 37 does not mean "necessarily." The Tribunal concluded that the questions raised by the Revenue did not present substantial legal issues for consideration, indicating that the expenditure incurred for promoting business and earning profits could be claimed as a deduction under the Act.

Issue 3: Disallowance of Director's remuneration under Section 153-A of the Act:
The Tribunal found that the disallowance of Director's remuneration was not within the scope of Section 153-A, as the Director's admission of not attending the office did not warrant such disallowance. The Tribunal emphasized the Director's role and the lack of evidence against the allowance of remuneration.

Issue 4: Reliance on findings of DRI for addition made in the assessment:
The Tribunal noted that the assessing officer solely relied on the findings of DRI, a Government Agency, without conducting an independent inquiry. The Tribunal highlighted that the information provided by DRI could be fully relied upon, emphasizing the credibility of the Government Agency's findings.

Issue 5: Deletion of additions based on CESTAT's order and pending appeal before the High Court of Gujarat:
The Tribunal deleted the additions based on CESTAT's order, which was challenged by the Commissioner of Customs before the High Court of Gujarat. The High Court admitted the tax appeal on substantial questions of law, leading to the admission of the appeal concerning the additions made in the assessment.

This comprehensive analysis outlines the key legal issues and the Tribunal's decisions regarding the disallowance of Director's remuneration, reliance on DRI's findings, and the impact of CESTAT's order on the assessment, providing a detailed understanding of the judgment delivered by the High Court.