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TMI Blog2015 (12) TMI 297X X X X Extracts X X X X X X X X Extracts X X X X ..... TMI 208 - BOMBAY HIGH COURT) squarely applies to the facts of the instant case. Hence, on this count the disallowance made u/s 40A(2)(a) is liable to the deleted in all the three years. In view of the foregoing discussions, we are of the view that there is no justification on the part of Ld CIT(A) in confirming the disallowance made u/s 40A(2)(a) of the Act. - Decided in favour of assessee. Disallowance of depreciation - Held that:- Hon’ble Gujarat High Court has considered identical issue in the case of Aravali finlease Ltd (2011 (8) TMI 814 - Gujarat High Court ) and has taken the decision that the depreciation is allowable in the hands of the company, even if it is registered in the name of its director provided that the vehicle is used for the purpose of business of company and income derived there from was shown as income of the company. In the instant case there is no dispute with regard to the fact that the vehicles are used for the purpose of business of the assessee company. In the case of Basti Sugar Mills Co. Ltd (2002 (5) TMI 27 - DELHI High Court), the Hon’ble Delhi High Court approved the decision of the Tribunal in holding that, since vehicle is a movable asset, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll the three assessment years by following his order passed for assessment year 2007-08. It is pertinent to note that Tribunal had partially confirmed the disallowance in assessment year 2010-11. 4. The assessing officer noticed that the assessee had purchased vehicles in the name of its directors and claimed depreciation thereon. Though the said vehicles were accounted as the assets of the assessee company, the AO disallowed the depreciation claim on the reasoning that the assessee cannot be considered to be the legal owner of the vehicles. The Ld CIT(A) also confirmed the said disallowance in all the three years under consideration. It is pertinent to note that the Tribunal also confirmed the disallowance of depreciation made in AY 2007-08. 5. We shall take up the first issue relating to disallowance made u/s 40A(2)(a) of the Act. In assessment year 2008-09, the assessee paid incentives to its three directors aggregating to ₹ 45.00 lakhs. Since the identical incentive payments made to the directors in the immediately preceding year was disallowed, the assessing officer asked to the assessee to justify the payments made in the year relevant to AY 2008-09. Even though t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession or the benefit derived by or accruing to him there from, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. 7. The Hon ble Kolkatta Special bench of ITAT had an occasion to examine the provisions of sec. 40A(2)(a) of the Act in the case of JCIT Vs. ITC Ltd (112 ITD 57)(Kol) and it has been held as under:- 89. A plain reading of the provisions contained in section 40A(2)(a) makes it clear that it would be applicable only if the following conditions are satisfied:- (i) where the assessee incurs any expenditure; (ii) the payment for such expenditure is to be made to any person referred to in clause (b) of this sub-section; (iii) the assessing officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facility for which the payment is made. 90. All the above conditions must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Company. The Company has appointed three directors who are responsible for managing the affairs of the Company. They provide services which vary from taking vital decisions concerned with the affairs of the Company to managing the day to day operations of the Company. The directors are compensated by the Company for the services rendered by them. Note on services rendered by the directors along with supporting documents to prove the actual rendering of services is enclosed for your perusal (Annexure I). All the directors are whole time directors of the Company and devote their time only to the business of the Company. This can be evident from their return of Income as they do not have any other Income except the remuneration and incentive received from the Company. Incentives remuneration paid to the directors are reflected in their individual return as a salary only and no expenses is claimed out of incentives paid to directors. All the Directors are well educated and in fact two of them are MBA from reputed university of Australia/ Switzerland. Note on job Profile of the directors along with copy of their return of income is enclosed for your perusal. (Annexure II) . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the competitive market. In the present case the Company has remunerated the directors in the form of salary and incentives for developing the business as well as operating the day to day affairs of the business. Considering the nature of services rendered by the directors, high demand for managerial personnel and acute competition in the market the remuneration paid to the whole time directors of the Company is reasonable and-not excessive. Without prejudice to above it is submitted that the directors to whom incentives is paid are also taxed under the same tax bracket as the company pays tax i.e. @30% and considering the fact that they have been paid incentive for excellent performance of the company, the payments made are bonafide and not merely device to reduce tax liability there is no evasion payment of tax by the Company by alleged payment of higher incentives to its directors. Further jurisdictional Bombay High Court in case of CIT V/s INDO SAUDI SERVICES (TRAVEL) (P.) LTD. 310 ITR 306) (Bom) Under the CBDT Circular No. 6-P, dated 6th July, 1968 it is stated that no disallowance is to be made under section 40A(2) in respect of the payments made to the relati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... universities, admissions, bank loan, visas, accommodation, etc to assist them totally for their enrolment in foreign universities. 2. Supervise and oversee the total operations of counsellors who are giving the counselling to the students for their overseas education studies. 3. Coordination with bankers for student loan and their foreign exchange requirements. 4. Continuous interactions and email correspondence with various universities for seats available in various courses, status of offer and admission, list of students registered. Annexure No. 1 5. Many universities visit their office-for conducting interviews for which they advertise in the newspaper, invite students to visit their office to meet the foreign university faculties international officers. They supervise total operation of telecallers to inform invite interested students to come for interviews. In their office they have to make arrangements for large number of students appearing for interviews get them proper time slots. Annexure no.2 6. Frequently visit overseas universities to meet their international officers, faculties and update ourselves with the latest syllabus, program, fee struct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ograms. Annexure no.6 11. They themselves do the media jobs such as designing releasing the ads in the news paper, print their color brochures leaflets, give articles in the news paper. They have succeeded in getting attractive discounted rates from Media. Annexure no. 7 12. Looking after marketing and business promotion of the company to get growth every year. 13. Travel to branches frequently to monitor and to look after the total operation of the business including students counseling, recruitment of staff and their needs to run branches smoothly. Annexure no. 8 14. All the Bills and payments are checked, verified and initialled by them before making payments to staff, suppliers and vendors. Annexure no.9 15. They recruit staff by releasing advertisement in the news papers or with tie up with recruitment placement agencies. They conduct interviews for selecting suitable candidates for the jobs. Annexure no.10. 16. All the banking operations and signing of all cheques are done by them only. Annexure 11. 17: All universities billing for students enrolled is done by them. Annexure no.12 . They have not appointed any HR Manager, Media ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... implementation of ecrm software to function students enquiries and enrollment and data online. Website designing and maintenance. Internet marketing through google. Telemarketing like BPO centre. Assisting students for education loan from the banks Updating himself with visa requirements for various countries and assisting students to ensure issuance of visa to students with above 95% success. AJAY SUKHWANI He has graduated from University of Mumbai and has done his Masters in business Administration from Switzerland with high grades. He assisted his brother in managing 3 Aptech training centers. He has taken the following responsibilities. He is incharge of UK, Australia and New Zealand universities. He travels regularly to UK and other overseas countries for tie ups with new universities, updating himself with new course materials, fee structures and other universities related information. He travels to branches and focuses on training of counselors for providing proper and update info to the students of the branches He is incharge of database and collects database at HO branches from the schools; colleges and other educational in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ag Coimbatore Cochin Hyderabad Kolkata Delhi Chennai Malad, Mumbai Surat Thane The above said facts relating to the growth of the company, in our view, vindicate the claim of the assessee that all the company has grown under the leadership of all the three directors. 13. Under section 40A(2)(a) of the Act, the assessing officer is required to find out as to whether the payment made to the persons referred to in section 40A(2)(b) is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by accruing to the assessee there from. 14. In the instant case, it is already noted that the key personnels have not been appointed and all the three directors are in charge of all the operations, meaning thereby, there was legitimate need for the business of the assessee company to employ qualified and experienced persons to carry out its business operations relating to educational consultacy and the said need was fulfil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of business. It is pertinent to note that the salary paid to the directors has been fully allowed by the assessing officer and he has disallowed only the incentives paid to them. The said action of the assessing officer is contradictory to the observation made by him. We have earlier noticed that the payment is made to the directors having regard to the services rendered by them to the company. Hence, the assessing officer should have examined the payments having regard to the fair market value of services rendered. 17. We notice that the assessing officer did not examine the aspect of fair market value of services at all. He has simply disallowed the incentive payments for the reason that similar payment was disallowed in assessment year 2007-08. In the case of ITC Ltd (supra), the Special bench of Kolkatta ITAT has held as under:- . In this regard, the revenue rightly submitted that whether the payment was excessive or unreasonable was to be examined in each year and merely because in the preceding year the addition was deleted by the Tribunal, it would not be sufficient to delete the addition in subsequent year, because the payment may be reasonable in one year and it ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inding decision rendered by the Hon ble jurisdictional Bombay High Court in the case of CIT Vs. Indo Saudi Services (Travel) (P) Ltd (2009)(310 ITR 306), wherein the Hon ble Bombay High Court referred to the Circular issued by CBDT with regard to sec. 40A(2)(a) as under:- Under the CBDT Circular No. 6-P, dated 6th July, 1968 it is stated that no disallowance is to be made under section 40A(2) in respect of payments made to relatives and sister concerns where there is no attempt to evade tax. In the case before the Bombay High Court, the revenue was not in a position to show as to how the assessee therein evaded payment of tax by alleged payment made to its sister concern, since the sister concern was also paying tax at higher rate and hence the disallowance made u/s 40A(2)(a) was deleted. We further notice that the Hon ble Bombay High Court has expressed identical view in the case of V.S. Dempo Co. (P) Ltd (336 ITR 209) also. The Hon ble Punjab Haryana High Court has also expressed similar view in the case of CIT Vs. Siya Ram Garg (HUF) (2011)(237 CTR 321). 21. We notice that in the instant cases also, identical position is obtaining, i.e., the directors are also pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd (226 ITR 625) (b) ITO Vs. Electro Ferro Alloys Ltd (2012)(13 ITR (Tri) 594 (c) CIT Vs. Aravali Finlease Ltd (2012)9341 ITR 282)(Guj) (d) CIT Vs. Basti Sugar Mills Co. Ltd (2002)(257 ITR 88)(Delhi) 24. On the contrary, the Ld D.R submitted that the co-ordinate bench of Tribunal has confirmed identical disallowance made in the assessee s own case in AY 2007-08. 25. We have heard the parties on this issue and perused the record. We notice that the Hon ble Gujarat High Court has considered identical issue in the case of Aravali finlease Ltd (supra) and has taken the decision that the depreciation is allowable in the hands of the company, even if it is registered in the name of its director provided that the vehicle is used for the purpose of business of company and income derived there from was shown as income of the company. In the instant case there is no dispute with regard to the fact that the vehicles are used for the purpose of business of the assessee company. In the case of Basti Sugar Mills Co. Ltd (supra), the Hon ble Delhi High Court approved the decision of the Tribunal in holding that, since vehicle is a movable asset, the registration as required in th ..... 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