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TMI Blog2019 (10) TMI 1024X X X X Extracts X X X X X X X X Extracts X X X X ..... rience. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has debited salary expenditure of ₹ 6,25,64,280/- which is more than thrice as compared to immediately preceding year. It was further noticed from the Board s Resolution for Remuneration of Directors, that one Shri Bhavesh G. Acharya, an employee was paid exorbitant salary who purchased 400 shares, the face value of which was of ₹ 10, at a premium of ₹ 9,590/-. Total investment made by him was to the tune of ₹ 38,40,000/-. It was found that he was taken up the job of the assessee company at a lower salary than he was drawing presently on the assurance that he will be benefiting by investing in the shares of the assessee company. It is relevant to mention that the said shares were later on sold to the Directors/Promoters of the assessee company at colossal loss. Hence, the assessee has compensated Shri Acharya by increasing his salary to makeup the loss incurred as opined by the Learned AO. Further that there was no substantial increase in number of employees as compared to last year. Apart from that, it was observed that assessee has introduced capital by issuing share with premium mainly from the Directors and employees. Majority of such capital wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for part of the previous year, were employed for full part of the captioned year and hence their total salary expenses for the entire year was included in the only in captioned year, i.e. FY 2012-13. Therefore, upon a comparison of the annualized salary for same employees which were employed in earlier year, i.e. FY 2011-12, the same would amount to ₹ 5,90,34,991 against which actual salary paid to them in FY 2012-13 was ₹ 3,62,15,515. Hence, in respect of same employees which were employed in both FY 2011-12 as well as FY 2012-13, there was decrease in their salary expenses by ₹ 2,27,92,740/-. A detailed comparison of the salary paid in FY 2011-12 and FY 2012- 13 is attached as Annexure 4. 1.5 Further, the Appellant submits that even after considering 49 new employees which were employed only in FY 2012-13, total salary expenses for the FY 2012-13 amounts to only ₹ 5,56,89,030 as against annualized -salary expenses of ₹ 5,90,34,991 which would have been incurred in FY 2011-12. The working of the same is also attached in Annexure 5. Thus, on an overall basis, your Honour would appreciate that salary expenses in the FY 2012-13 has de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or organization he was heading business of USD 500 million spread over 6 countries. He had relationships with global pharmaceutical companies in US, Europe and Japan. In view of his rich experience and relationships, he was appointed by the company. In the company he is responsible for building and developing sales plans, mentor sales teams and managing relationships with customers. It was due to his rich experience and expertise he brought on, he contributed to the increase in turnover of the company. 1.8. In view of the above, it is respectfully submitted that, as Mr. Lalit Pai was bringing rich experience and expertise he was given onetime bonus of ₹ 65,00,000/- at the time of joining the company. The said amount was decided in the employment contract and hence, as per the contractual terms, the same was paid to him. A copy of the contract with Mr. Lalit Pai is attached as Annexure 8to substantiate the same. Further, Appellant has also deducted taxes due under section 192 of the Act on entire payment made to Mr. Lalit Pai. Hence, the entire expenditure was genuine and TDS was appropriately deducted on the same. Thus, the allegation of the learned AO tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or excessive. 1.13 In this regards, the Appellant humbly submits that the above expense have been incurred wholly and exclusively for the purpose of the Appellant's business and the learned AO has nowhere contended that these expenses were not undertaken for the purpose of business. Accordingly, as all salary expenses were incurred wholly and exclusively for the purpose of business of the Appellant, the same should be allowed as a deduction under section 37(1) of the Act. 1.14 In this regard, Appellant submits that Hon'ble Supreme Court in the case of Sassoon J David and Co (P) Ltd v CIT (118ITR 261), observed as follows: It has to be observed here that the expression wholly and exclusively used in s. 10(2)(xv) of the Act 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 and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under section 10(2)(xv) of the Act even though there was no compelli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture incurred 'wholly and exclusively for the purposes of the business', it is not required to conclusively demonstrate that the expenditure was incurred out of a compelling necessity, but was incurred on for the purpose of assessee's business; It is for the assessee to decide whether any expenditure should be incurred in the course of his business. 1.18 Further, there are various judicial precedents which have recognized that any expenses incurred wholly and exclusively for the purposes of the Assessee's business are to be allowed as a deduction and reasonableness of the expenditure cannot be taken as a plea to disallow the same. 1.19 It is not open to the department to adopt a subjective standard of reasonableness and decide what type of expenditure the assessee should incur and in what circumstances. The department cannot justifiably claim to put itself in the chair of the businessman and assume the said role to decide how much is a reasonable expenditure having regard to the circumstances of the case. 1.20 Reliance in this regard is placed on the following judicial precedents: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of the expenditure incurred by the assessee wholly and exclusively for its own business, incidentally some third party is also benefited is no ground to disallow any part of such expenditure. CIT vs Jagannath Kisonlal(30 ITR 654)(Bom) subsequently approved by the Supreme Court (41 ITR 360), it has been held as follows: An expenditure may not help an assessee to earn the income or to increase the income, and yet from the point of view of commercial expediency it may be necessary for the business; for instance, it may be necessary to preserve the assets of the business or to increase the reputation of the business. It may not bring in results in the sense of increased income and yet a commercial man may think that those expenses are necessary from a commercial point of view for the purpose of the business. Commissioner of Income-tax v Sales Magnesite (Pvt.) Ltd. (214 ITR 1)(Bom) The question whether expenditure incurred for the purposes of business must be viewed in the larger context of business necessity or commercial expediency. No abstract or pedantic view can be taken in the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excessive by the Learned AO have been taxed as salary income in hands of its directors and its employees. Further, they are covered in the highest tax bracket of 30 percent. In this Regard, copy of acknowledgment of return of income for AY 2013-14 pertaining to directors, Suresh Ramu and Himanshu Shah and employees, Lalit Pai and Bhavesh Acharya are attached as Annexure 1, Annexure 2, Annexure 3 and Annexure 4 respectively. The said acknowledgment of return of income for the captioned year substantiates that they are covered in highest tax bracket of 30 percent. Hence, as the Appellant as well as its Directors and employees were both assessed tax at the rate of 30%, the issue is revenue neutral. 1.4 The learned AO has failed to appreciate that tax has already been paid on such income by the Directors and its employees. Hence, the disallowing the same in the hands of the Appellant would tantamount to double taxation. 1.5 In this regard, Appellant would additionally like to submit that the jurisdictional Hon'ble Gujarat High Court in the case of PWS Engineers Limited vs. DCIT (Tax Appeal No. 209 of 2015) has held that where remuneration was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee in support of his case. 4. At the time of hearing of the instant appeal, the Learned Counsel appearing for the assessee submitted before us that the error committed by the Learned AO was duly pointed out before the first appellate authority in all counts. Apart from that the commercial expediency of the payments for smooth functioning and furtherance of its business was also duly placed before the authorities below. It was further submitted by the Learned AR that 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 and if it is incurred for promoting the business and to earn profit, the assessee can claim deduction under section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. In this aspect reliance were placed in the judgment passed by the Apex Court in the matter of Sassoon J. Devid and Co. (P) Ltd.-vs-CIT reported in 118 ITR 261. Apart from that where remuneration was taxed in the hands of the directors at the same rate at which it would have been taxed in the hands of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear, were employed for full part of the captioned year and hence, their total salary expenses for the entire year was included only in captioned year, i.e. FY 2012-13. Therefore, upon a comparison of the annual/zed salary for same employees which were employed in earlier year i.e. FY 2011-12, the same would amount to ₹ 5,90,34,991 against which actual salary paid to them in FY 2012-13 was ₹ 3,62,15,515. Hence, in respect of same employees which were employed in both FY 2011-12 as well as FY 2012-13, there was decrease in their salary expenses by ₹ 2,27,92,740/-. A detailed comparison of the salary paid in FY 2011-12 and FY 2012-13 is attached as Annexure 4. 2.5.1. Further, the Appellant submits that even after considering 49 new employees which were employed only in FY 2012-13, total salary expenses for the FY 2012-13 amounts to only ₹ 5,56,89,030/- as against annuallzed salary expenses of ₹ 5,90,34,991/- which would have been incurred in FY 2011-12. The working of the same is a/so attached in Annexure 5. Thus, on an overall basis, it would be appreciated that salary expenses in the FY 2012-13 has decreased by approximately 5.6% as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was paid to him. A copy of the contract with Mr. Lalit Pal is attached as Annexure 8 to substantiate the same. Further, Appellant has also deducted taxes due under section 192 of the Act on entire payment made to Mr.Lalit Pai. Hence, the entire expenditure was genuine and TDS was appropriately deducted on the same. Thus, the allegation of the learned AO that amount paid to Lalit Pai was without any business expediency is incorrect and without any basis. 2.5.4. In addition to the above, the learned AO has alleged that Mr. Bhavesh Acharya, an employee of the company was paid higher salary to compensate for losses incurred in investment made in the Appellant Company. The Appellant company had appointed Mr. Bhavesh Acharya as Senior Director - Project Solutions only on 4 August 2012 and hence, there was no increase in salary as compared to earlier year, as he was not at all employed in FY 2011-12. Hence, there is no question of any compensation being paid to him for loss in his investment value. Accordingly, it seems that there is some misunderstanding while replying to question no. 7 recorded by learned AO under section 131 of the Act. Copy of statement of Mr. Bha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t both Appellant company as well as its Directors and employees were assessed to tax at the highest rate of 30% and hence, this entire issue is revenue neutral In this regard, Appellant has submitted that the jurisdictional Hon'ble Gujarat High Court in the case of PWS Engineers Limited vs DCIT (Tax Appeal No. 209 of 2015) has held that where remuneration was taxed in the hands of director at the same rate at which it would have been taxed in the hands of the company, the same would be revenue neutral. Hence, disallowing the remuneration to be excessive in the hands of the company, would amount to double taxation which is not possible. Accordingly, Hon'ble High Court allowed the appeal of the company. 2.6. I have carefully considered the facts of the case, the assessment order and the written submissions of the Appellant. The Appellant has contended that it was incorporated only on 11 March 2011 and since AY 2012-13 was the first year of operation and accordingly, salary payments consisted of employees which were employed only for part of the year. However, all these employees were employed for full year in AY 2013-14. As per the working submitted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the employment contract and it is not open for the AO to question the commercial expediency of a businessman. 2.6.3. On a careful examination of the entire facts of the case, it is noted that the AO has nowhere disputed that the employees/directors have not rendered any services to the Appellant company. Hence, there is no dispute on factum of services rendered by Directors/employees. Further, the AO has not disallowed any expenses u/s 40A(2)(b) of the Act. It is a settled law that the reasonableness of employee expenses is not relevant to claiming deduction of expenses under section 37(1) of the IT Act. Additionally, the commercial expediency / business rationale of a particular expenditure incurred by an assessee for the smooth functioning and furtherance of its business is its prerogative and hence, the same cannot be questioned by the AO. Further, I find that in following judicial precedents, Hon'ble Supreme Court has specifically held that it is for the assessee to decide which expenditure has to be incurred in its business and the same cannot be decided by the AO. Sassoon J David and Co (P) Ltd v CIT (118 ITR 261), observed as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) wherein it was held on grounds of revenue neutrality if once the income is being charged in the hands of the directors in the highest tax bracket, taxing the same in the hands of the company would amount to double taxation. Hence, based on the facts of the case and the various judicial precedents cited by the Appellant, I find that the AO was incorrect in disallowing employee benefit expenses amounting to ₹ 3,41,72,205/- and the same should be allowed u/s 37(1) of the Act. The A.O. is directed to give relief accordingly. The ground of the appeal is allowed. We find that the 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 ₹ 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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