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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 ..... s to its three directors and the aggregate amount of incentive paid during the three years under consideration are given below:- Assessment year Amount 2008-09 45,00,000 2009-10 45,00,000 2010-11 64,00,000 The three directors to whom incentives were paid are Shri Assan Sukhwani, Shri Sushil Sukhwani and Shri Ajay Sukhwani. During the course of assessment proceedings relating to AY 2008-09, the Assessing officer noticed that the identical payments made in assessment year 2007-08 had been disallowed u/s 40A(2)(a) of the Act and the same was also confirmed by Ld CIT(A). Hence the assessing officer disallowed the above said claim in AY 2008-09 and by following the said order, the AO disallowed the identical claims made in assessment years 2009-10 and 2010-11 also. The Ld CIT(A) also confirmed the said disallowances in all 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 vehicl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee company and the directors are one and the same and he has entertained the said presumption without bringing any material to lift the corporate veil. On the contrary, after making above said observations, he has assessed the income of the assessee company in its hands only, meaning thereby, he has also recognized the fact that the assessee company and its directors are different persons under the Income tax Act. Thus, we notice that the assessing officer has not examined the impugned payment of incentive in terms of conditions prescribed in sec. 40A(2)(a) of the Act. 6. The provisions of sec. 40A(2)(a) reads as under:- "40A(2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the 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 unreas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be disallowed is the portion of the expenditure which is considered to be excessive or unreasonable. 10. We notice that the assessee has offered following explanations during the course of assessment proceedings relating to AY 2008-09 in order to justify the payment of incentives to the directors. "As regards to your query why incentives paid to directors should not be disallowed we submit as under : "The Assessee is a Private Limited Company (hereinafter referred to as the Company) engaged in the business of assisting students in overseas education and providing guidance for higher education in various countries such as UK, Australia, Canada, New Zealand and U.SA. As the Company is engaged in service sector qualified and experienced personnel is required to manage the affairs of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ector's efforts and achievement to qualify for the reward in form of incentives. We would like to enclose the salary paid to the remaining executives & staff. (Annexure Ill) Presently the demand for qualified and experienced managerial personnel has gone up in the market and it is difficult for the companies in the industry to locate such personnel and avail their services to develop the business of the Company. The role of the managerial personnel is to generate the business for the Assessee Company as well as to execute the operations in a timely manner. Due to the acute competition in the market the Companies pay adequate remuneration in the form of salary, commission and incentives to managerial personnel who are responsible for business development 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han the remuneration paid to managerial personnel across the industry in various sectors handling responsibilities and having job profile similar to the directors of Assessee company. Therefore, based on the above facts and the judicial decisions the remuneration in inclusive of incentive paid to directors is reasonable justified and not excessive. Note on nature of services rendered by the Directors : There are three Directors in the company Ms. Assan H Sukhwani, Mr. Sushil A Sukhwani and Ajay A Sukhwani. Each one of them is working full time for conducting business of Edwise Consultants Pvt Ltd, while attending day to day working of the company they do the follows : 1. Meet the students and monitor their needs for selection of 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 av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate students about teething problem they may encounter overseas. They familiarize them about countries they are visiting, their campuses, their transportation & other important information. They invite Visa Officers from Consulate, Bank Staff offering Loan, foreign exchange and opening bank account before landing at university campuses, Mobile Vendors to carry the mobile, SIM card for overseas countries, Insurance companies to give them Travel insurance and medical insurance while living there, Airlines who offers them concessional tickets and extra baggage without excess baggage charges. During the year Citi Bank, Centurion Bank of Punjab, Matrix Cellular Services participated in their pre departure programs. 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 studen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grades. He managed 3 Aptech Computer training centers with high enrolments and collections. Simultaneously, he started overseas education consultancy to enroll students for universities overseas. He has taken the following responsibilities. *Incharge for USA & Canadian Universities for their tie ups. *Regularly travels to USA, Canada, France for interaction and for new tie ups with universities. *Travels to branches to meet their needs, recruiting new staff, getting them proper computer equipments and its smooth functioning *Controls full media and ad campaigns, world education fairs of edwise in all cities *Development & 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 assiste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties added 62 48 37 42 Branches opened Ahmedabad Vizag 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 fulfilled by the three directors. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 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 may be unreasonable or excessive in ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ombay 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 paying tax at higher rate in all the three years under considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 the case of transfer of immovable property is not a condition precedent for legal ownership. In the instant case, the funds for purchase of vehicles have been provided by the assessee company and they have been shown as assets of the assessee company. Hence, in our view, the assessee company should be considered as owner for all practical purposes and hence i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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