HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 609 / 2011 Commissioner of Income Tax, Jaipur-II, Jaipur ----Appellant Versus M/S Swapan Sakar Insurance Consultant & Marketing Services (P) Ltd. C-26, 3rd Floor, Lal Kothi, Jaipur ----Respondent For Appellant(s) : Mr. R.B. Mathur For Respondent(s) : Mr. Siddarth Ranka HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGH Judgment 01/08/2017 1. By way of this appeal, appellant has assailed judgment and order of Tribunal whereby Tribunal has partly allowed appeal of assessee and modifying order of AO as well as CIT(A). 2. This Court while admitting matter framed following questions of law:- Whether in facts and circumstances of case, ITAT was justified in allowing payment of commission/incentives to Directors of Company as business eligible u/s 40A(2)(b) of Act despite of fact that said Director was not having basic knowledge of function of company and their duties? 3. Mr. Mathur has taken us to order of CIT(A) in para 1.3 wherein it has been observed as under:- (2 of 9) [ITA-609/2011] 1.3. I have considered facts of case and arguments taken by Sh.Dani quite carefully. After going through scheme of such commission/incentive payment under which payment of commission has been made to Smt. Sapna Jain director and Sh. Shyam Sundar Sharma brother of director who are considered as related persons within meaning of S.40(2)(b) of I.T. Act it is clear that there is no commensurate efforts/services made by these persons in bringing Rs. 2500 as registration charges payment by subsequent members of chain. U/s 40A(2)(a) when assessee incurs any expenditure in respect of which payment has been made or is to be made to such related persons and AO is of opinion that such expenditure is excessive or unreasonable having regard to fair market value of goods, services or facilities for which payment is made or legitimate needs of business then so much of expenditure as considered by AO to be excessive or unreasonable cannot be allowed as deduction. As per this provision when opportunity was given it was required to be proved that such payment made to these related persons is not excessive or is not unreasonable having regard to services received by appellant company. After going through questions and answer as reproduced by assessing officer in body of assessment order from statement of Smt. Sapna Jain and Sh. Shyam Sundar Sharma it is clear that certainly services/benefits in commensuration of such payment made has not been obtained by appellant company. Smt. Sapna Jain was not knowing anything regarding nature of registration expenses received from new member when nothing is paid to such immediate new member. She was not knowing even number of good performer in company work though she was director. She even did not remember that how much commission was paid to her and what was basis of payment of commission made. Surprisingly, when specific question was asked that what services are being rendered by her in company or in other words what were nature of her duties then she replied that she attended duties of general nature and remaining she do not remember. Similarly, when statement of Sh. Shyam Sundar Sharma who was brother of Director Sh. Deepak Sharma was recorded he was not having detailed knowledge of affairs of company though he has stated that he was working as network manager and his job responsibilities includes managing multi level marketing division of company. On factual analysis it is seen that absolutely and certainly these persons were doing nothing in order to bring Rs. (3 of 9) [ITA-609/2011] 2,500/- as registration fee from new member out of which they were receiving their cut as commission/incentive. basic requirement to allow any expenditure/deduction particularly within meaning of S.40A(2)(b) of I.T. Act is that company should must receive equivalent amount of service/benefit from person to whom such payment has been made by appellant company which is claimed as deduction. What to talk of equivalent amount of service/benefit from these related persons but virtually nothing has been done by these persons in bringing Rs. 2500/- as registration charges from new members added out of which as per carefully drafted scheme of incentive/commission they have pocketed funds of company. Under these circumstances in my considered view assessing officer was justified and liberal even in allowing Rs. 9.5 lacs as commission/incentive to these two persons as reasonable and not excessive. With discussion said disallowance of commission/incentive to these related persons of amount of Rs. 1,23,42,430/- is hereby confirmed by rejecting relevant ground of appeal. 4. He contended that both Directors were not qualified and one of Director lady was not knowing how to run business. 5. Counsel for appellant has relied upon decision in case of Commissioner of Income Tax vs. Paarel Imports and Exports (P) Ltd. reported in [2008] 218 CTR (Ker) 685 wherein it has been held as under:- 6. Section 40A (2)(a) and (2)(b) is in following terms: 40A(2)(a) : Where 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 AO is of opinion that such expenditure is excessive or unreasonable having regard to fair market value of goods, services or facilities for which payment is made or legitimate needs of business or profession of assessee or benefit derived by or accruing to him therefrom, so much of expenditure as is so considered by him to be (4 of 9) [ITA-609/2011] excessive or unreasonable shall not be allowed as deduction. (b) persons referred to in Clause (a) are following, namely: (i) . . . (ii) Where assessee is company, firm, association of persons or Hindu Undivided family, ..any director of company, partner or firm, or member of association or family, or any relative of such direc tor partner or member; & (iii) & (iv) . . . . (v) company, firm, AOP or HUF or which director, partner or member, as case may be, has substantial interest in business or profession of assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member; Therefore, AO is obliged to consider whether payments made to persons made mention in Clause (b) towards service charges are for legitimate needs of business or profession of assessee. Herein, facts show that company consists of four shareholders, viz. (1) Mr. Thomas Elias Parrel, (2) Mrs. Ponnamma Elias, (3) Mr. Kuriakose Elias Paarel and (4) Mrs. Roshini Punnoose. managing director is sl. No. 1 and sl. Nos. 3 and 4 were directors. names of partners show that they are managing director of company, another director of company, brother of managing director who is employee of company and father of managing director. managing director had received salary and commission amounting to Rs. 1,21,730, Shri Kuriakose Elias Paarel, who is director, had received remuneration and commission of Rs. 1,60,730, Shri Punnoose Elias Paarel who is brother of managing director and employee of company, has been paid salary of Rs. 71,090 and commission of Rs. 12,331 by company during relevant period. During period relevant for asst. yr. 1991-92, assessee had not incurred any expenditure on account of service charges. During year ended on 31st March, 1991 total sales stood at Rs. 2,57,72,289, whereas for year which ended on 31st March, 1992 total sales stood at Rs. 3,24,60,746. It was noticed by AO that during year 1992-93 (5 of 9) [ITA-609/2011] percentage of discount was 3.81 percent, whereas during year which ended on 31st March, 1991 percentage of discount was 1.88 per cent and therefore increase in overall sales is only due to increase in amount of discount. In fact, above finding rendered by AO is based on correct appreciation of actual factual position. increase in sales turnover is not due to any extra effort done by consulting firm. In fact, managing director and other directors have received remuneration from company and they have rendered services in general administration, marketing, etc., to company. For very same functions service charges have been paid to firm M/s Team Paarel. It really shows that persons concerned are same and remuneration actually received from company reflects service rendered by them to company and it is not due to any extra service rendered by them as partners of M/s Team Paarel. 7. assessee has got case that chartered accountant, viz., Mr. Stanly Kunjipalu was retained by M/s Team Paarel for giving advice on financial and accounts matters and he was also giving services on management and information system to company and whose charges were paid by M/s Team Paarel, AO found that this claim is not correct. letter dt. 1st Nov., 1993 by which details are furnished by assessee shows that said chartered accountant had received professional charges from company which have been remitted by company in its accounts. company had also paid charges to advocate, chartered engineer, etc. Therefore, service charges have already been met by company which are reflected in their accounts wherein firm Team Paarel does not come into picture at all. 8. Thus, it is case where real nature of payment shows that very same persons who are managing company, have been shown as in receipt of remuneration being partners of firm. While considering this question, dictum laid down in McDowell & Co. Ltd. (supra) is relevant. Chinnappa Reddy, J. in concurring judgment, reiterated that 'in our view, proper way to construe taxing statute, while considering device to avoid tax, is not to ask whether provisions should be construed literally or liberally, nor whether transaction is not unreal and not (6 of 9) [ITA-609/2011] prohibited by statute, but whether transaction is device to avoid tax and whether transaction is such that judicial process may accord its approval to it'. In light of above dictum, we are of view that transaction herein is clearly device to avoid tax and same is not convincing. 9. CIT(A) reversed order passed by AO only on ground that to have application of Section 40A(2)(b) of Act, it should have been established that fair market value of services for which payment is made Is less than amount paid by assessee. real issue was not at all considered by CIT(A). approach made is totally erroneous. Tribunal after noticing that managing director or some of directors of assessee-company are related to partners of firm, referred to claim of assessee that specialised services rendered by them are those which assesses company could not do and they helped to increase export market. Tribunal assumed that they also introduced some innovation in working of company to boost production and it was presumed that payment of service charges paid by assessee was not (for) business expediency and hence allowable deduction. We are of view that none of aspects relevant have been considered by Tribunal and import of Section 40A(2)(b) has not been discussed. fact that there was no business increase actually, because of services rendered by them, was also not considered and fact that company has been paying salary and commission to them for some service was also not considered, approach made is totally perverse and there is no rationale in it. 6. He has also relied upon decision of Punjab and Haryana High Court in case of Romesh Kumar vs. CIT wherein it has been held as under:- 14. It was on basis of these observations that assessing officer had disallowed commission claimed in both assessment years holding that commission had been paid on non-business grounds and was device to reduce assessees taxable income. Commissioner (Appeals) had also turned down pleas put forth by assessee that payment of commission to (7 of 9) [ITA-609/2011] Anil Kumar Gupta was compulsion to retain his services for improvement of business. Commissioner (Appeals) had come to finding that assessee had failed to prove that Anil Kumar Gupta had contributed anything towards improvement of business to justify payment of huge commission to him. When entire matter was re-agitated before Tribunal, its observations and findings were no different than ones given by assessing officer and affirmed by Commissioner (Appeals) on this count. Tribunal had come to definite finding that it was not on account of being nephew of assessee that he was paid such huge commission. It is also clear that it was well within recognizance of Tribunal that nephew was not included in term relative as per section 2(41) of Act. This aspect is not at all concerned with regard to rejection of plea of assessee and with making of addition in his income. It was on entirely different grounds. 17. Contention of learned counsel for assessee is that Court is concerned with actual action taken by assessee and not action which assessee should have taken under circumstances. It is further urged that it is not permissible in law to bring in suppositions and then to find out whether claim is allowable or not? Support has been sought from CIT v. Om Parkash Behl MANU/PH/0196/1979 : (1981) 132 ITR 342 (Punj. & Har.) and Smt. Radha Devi Mohatta v. CIT MANU/MH/0094/1980 : (1981) 129 ITR 229 (Bom.). 18. There is no dispute about law and there cannot be any. Facts of case in hand, however, are entirely different. When these facts are appreciated in context as also in circumstances in which commission was paid, no support from these judgments is available to assessee. All three revenue authorities on facts had come to one and same conclusion and there is concurrent finding that payment of commission shown in books of accounts of assessee was merely subterfuge to reduce tax liability of assessee. It is to be noticed that Tribunal had re-assessed entire issue and without being influenced by earlier two concurring findings, had independently also come to finding that claim on account of commission by assessee was not tenable in assessment years under appeal and that it had rightly been rejected. 19. As entire issue in these appeals concerns facts and attending circumstances and there is (8 of 9) [ITA-609/2011] nothing legal much less substantial to be adjudicated upon, no substantial question of law, in fact, arises for consideration in these appeals. questions posed by assessee thus need not be answered as same are based on facts. Consequently, both appeals, being without any merit, are dismissed. 7. Counsel for respondent Mr. Ranka contended that it was uniform distribution while person participated in business of company proportionate business income was paid to everyone. He has relied upon decision of this Court in DBITA No. 301/2009 dated 10th February, 2014 wherein Division Bench of this Court in para 16 has observed as under:- 16. Certainly, aforesaid section provides that AO, if he is of opinion that such expenditure is excessive or unreasonable, having regard to legitimate business needs of company and benefit derived by assessee, is not proper, has chance to disallow any amount over and above which he feels appropriate but opinion should be formed objectively from point of view of prudent businessman and after taking into account statutory criteria and all relevant circumstances and should not be influenced by immaterial considerations. Therefore, AO, in our view, has been influenced by extraneous considerations and has not properly appreciated involvement of Shri Viswas Jain in leading limited company of having substantial increase in receipts and overall results since limited company was formed. Not only that, we also notice that assessee-company as well as salary paid to Shri Viswas Jain has offered to tax at maximum rate in his individual capacity and therefore, it can be said that there is hardly any loss to revenue in so far as payment of salary is concerned. We have observed this only by way of observation, otherwise, as observed herein above, reasonableness has to be considered from angle of businessman and assessee, who happens to be businessman, certainly did consider that salary of Rs.24 lac to Shri Visvas Jain was fair and reasonable and after getting it approved, as observed herein above, in extra- ordinary general meeting of company. (9 of 9) [ITA-609/2011] 8. He has also relied upon decision of Gujarat High Court in case of Principal Commissioner of Income Tax-2 vs. Gujarat Gas Financial Services Ltd. reported [2015] 60 taxmann. Com 483 (Gujarat) wherein it has been held as under:- 15. It is pertinent to note that so far as Circular dated 6.7.1968 is concerned, it makes clear that provisions under Section 40A(2) and particularly with regard to transaction between relatives and associates is concerned, same shall be treated as bonafide case unless officer finds it that one of them is trying to evade payment of tax. 9. He has also relied upon decision of Bombay High Court in case of Commissioner of Income Tax vs.V.S. Dempo & Co. (P) Ltd. reported in [2011] 336 ITR 209 (Bombay) and another decision of Delhi High Court in case of Commissioner of Income Tax vs. Dr. R.N. Goel reported in [2009] 177 Taxman 374 (Delhi). 10. Taking into consideration fact that there was uniform distribution while person participated in business of company proportionate business income was paid to everyone. 11. We are in complete agreement with view taken by Tribunal. No case is made out for interference. 12. Hence, issue is required to be answered in favour of assessee against department. 13. appeal stands dismissed. (INDERJEET SINGH)J. (K.S.JHAVERI)J. A.Sharma/117 Commissioner of Income-tax, Jaipur-II, Jaipur v. Swapan Sakar Insurance Consultant & Marketing Services (P) Ltd