ITA No. 2732/Ahd/2013

Shri G. C. Gupta And Shri N. S. Saini,JJ.

For the Petitioner : Shri. M.G. Patel, AR
For the Petitioner : Shri V.K. Singh, Sr. DR

JUDGMENT

Per Shri N. S. Saini, Accountant Member:

This is an appeal filed by the assessee against the order of the Commissioner of Income-tax(Appeals)-IV, Baroda dated 19.09.2013 for Assessment Year 2010-11.

2. The Ground No.1 of the appeal reads as under:-

"The Learned Commissioner of Income Tax (Appeals)-IV, Baroda has erred in law and on facts of the case by confirming the disallowance of Director's Remuneration ofRs.71,30,178/- made by the Assessing Officer."

3. The brief facts of the case are that during the course of assessment proceedings it was found that the expenditure on account of Directors' Remuneration increased fromRs.9 lakhs in AY 2009-10 toRs.80,30,178/- in AY 2010-11. The Assessing Officer required the assessee to explain the reasons and justification of huge hike in the directors' remuneration. The assessee submitted that it has paid remuneration to the Directors as under:-
           

4. The assessee further explained that there was substantial rise in sales over preceding year and therefore, it was decided to give incentive to directors on the basis of sale in addition to normal salary paid to them. Copy of Board Resolution was filed before the Assessing Officer. It was further submitted that the Directors have disclosed the said salary income in their return of income and it was submitted that all the Directors have paid tax at maximum rate of 30% on their income.

5. The Assessing Officer did not accept the above explanation of the assessee on the ground that the hike in remuneration was given because of rise in sale but no evidence was furnished to substantiate and justify that the rise in sales was attributable to the efforts of the Directors only to whom hike in remuneration was given. The Assessing Officer further observed that payment of tax at maximum rate by Directors on their income does not justify and reasonablise the huge rise in the remuneration without evidences of rise in sale solely attributable to the efforts of the Directors only. In absence of such evidence, the Assessing Officer found that the Directors have not rendered any special service or any special exertion for increase in the sales. He further observed that much lesser remuneration paid to the Directors in the earlier years was not considered as inadequate by the Company. Therefore, giving huge rise in the Directors' remuneration only because of increase in sale was excessive, unreasonable and unjustified. He further found that the huge rise in the Directors' remuneration was not found to be wholly and exclusively for the purpose of the business. He has placed reliance on the decision of Hon'ble Supreme Court in the case of Swadeshi Cotton Mills Co. Ltd. v. CIT, (1967) 63 ITR 57. Therefore, the Assessing Officer disallowed the remuneration paid in excess ofRs.9 lakhs as excessive, unreasonable and unjustified and thereby made addition ofRs.71,30,178/- to the total income of the assessee.

6. Before CIT(A), the assessee submitted that the assessee was a Private Limited Company working with four Directors. There was 262% rise in sales due to extra-ordinary skillful efforts and marketing by Directors. It was further submitted that the section introduced only to curb and check tax evasion/tax reduction by paying unreasonable remuneration to Directors. A comparative income and tax working of company versus Directors will show that there was no such unreasonable remuneration. It was also submitted that the principle laid down by the Hon'ble Supreme Court in the case of Swadesh Cotton Mills Co. Ltd. (supra) was distinguishable. It was submitted that increase in sales coupled with special efforts made by each Director shows distinguishing to justify erroneous reliance placed by the Assessing Officer in the proceedings. The CIT(A), after considering the above submissions, confirmed the order of the Assessing Officer by observing as under:-

"4.4 I have considered the AO's observations and the appellant's submissions. The AO has disallowed the incentive paid to the Directors by holding that no evidence was furnished so as to substantiate and justify that the rise in sale was attributable to the special efforts made by Directors. He also held that in absence of any relevant evidence, it was found that the Directors have not rendered any special service or any special exertion for increase in the sale. Hence, the AO by relying upon the decision in the case of Swadeshi Cotton Mills Co. Limited (supra) held that Directors remuneration paid in excess ofRs.9,00,000/- was excessive, unreasonable and unjustified. Accordingly, the amount ofRs.71,30,178/- was disallowed and added to the total income of the appellant.

4.4.1 During the appellate proceedings, the appellant has controverted the finding of the AO by stating that there was 262% rise in sale due to extraordinary skilful efforts and marketing by Directors. The appellant has also submitted statements explaining developments in business and services rendered collectively by all Co-Directors. The appellant has furnished a chart of sales made in 2008-09 and financial 2009- 10 and has stated that the sale profit availability has gone up mainly due to innovation of newly developed latest technological packing equipments by all the Directors collectively during this year. List of such machines has been furnished as follows:-
           

                                                                                                                       
4.4.1.1 After this, the appellant has submitted the details of academic qualifications and duties of the Directors as follows: Dineshbhai Panchal - Director

-     Aged about 65 years academically passed B.E Engineering in Electricals
-     Looking after manufacturing of various types of machines. Long experience in manufacture as well as Research & Development of import substitute machines for packing has innovated now machines and handled customers requires sophisticate! machines which are not manufactured in the Country.

      The machines developed are ice-cream Fillers curd fillers, Chees Fillers, Lassi Shrikhanand or Margarine fillers Ice-cream bar making machines and sold during this year. Yogeshbhai Panchal - Director

-     Aged about 57 year academically passed B.Com/Diploma in Business Management.
-     Looking after accounts, banking finance purchase and marketing matter and working with all Government departments.
Long experience in factory and finance management as well as sale & marketing.
He manages smooth operations of the organization in terms inventory ordering, fund flow, timely payments to vendors, salary payment, tax payment to income tax VAT & Excise Departments. He assists in best machine manufacturing ability with better operational methods to provide an edge to company image not only as a best machine manufacture but also as a good company to its vendors. Rohitbhai Panchal - Director

- Aged about 53 years academically passed B.Com, LLB.
- Looking after marketing and customer matter, regular liaison with customer matter, regular liaison with customers and requirement of latest equipments in the developing economy. Long of experience in marketing of machine. He looked after marketing portfolio. He understands specific requirement introduces them in to the machine design & manufacture a machine as required by individual customer. This needs thought knowledge & understanding of basic concept of each machine model. He handles after sale services & commissioning of machine at customers site. Nishitbhai Panchai - Director

- Aged about 37 years academically passed Diploma Mech Engineers.
- Looking after assisting in production and quality matters factory administration.
Long experience assisting in manufacture activities looking after machine design & Automation.
The machine as developed of which programming of these machines is success.

He also co-ordinates procurement of components & bought outs. Getting complicated components manufactured at our factory plant & coordinating activities of timely manufacturing of even machine.
4.4.2 As held by Hon'ble Mumbai High Court in its decision in the case of Shatrunjay Diamonds, 128 taxmann 759 (Bombay), burden is on the assessee to establish that the payments made by him to concerns specified u/s 44A(2)(b) are not excessive. In the present case, the only explanation filed by the appellant is that the increase in sale was due to the efforts made by the Directors and hence incentive was paid to them. But such submission has not been supported by any material evidence to show that only the Directors were instrumental in increasing the sale and not other staff and employees. Besides from the details of qualification of the Directors it can be seen that only one person namely Shri Dineshbhai Panchal is having engineering qualification for making such type of innovations. Another Director Mr. Yogeshbhai Panchal is B.Com and Diploma holder in Business Management and the third director Mr. Rohitbhai Panchal is B.Com, LLB. The fourth director Mr. Nishitbhai Panchal is Diploma holder in Mechanical Engineering. How such other Directors contributed towards innovation of new machines is not established by the appellant. Besides such innovation cannot take place without the help of staff of the appellant company. But nothing has been submitted to the fact that the incentives were given to such staff also. Hon'ble Supreme Court in its decision in the case of Swadeshi Cotton Mills Co. Limited (supra) has held that ITO is entitled to examine the circumstances of the case to determine himself whether the remuneration paid to the employee or any portion thereof was properly deducted u/s 40A(2) of the IT Act. On the basis of these discussions it is held that AO has rightly disallowed the commission paid to the Directors. Besides such incentive payments also falls under the mischief of section 36(1)(ii) of the IT Act 1961 as is discussed in the following paragraphs.

4.5 The appellant's AR has submitted the details of the share holding of the appellant company. A perusal of the same shows that the share holding as on 01/04/2009 was as follows:-

4.5.1 It was further submitted that Shri Pravinbhai S Patel and his family intended to transfer share in the company and stopped Working in the business, hence no salary was paid to him after 13.03.2007. Thus, as on 01.04.2007, three families were having control over in the appellant company. These are the families headed by Shri Dineshbhai S Panchal, Shri Yogeshbhai S. Panchal and Rohitbhai Panchal. All these three persons are Directors of the appellant company. Besides the son of Shri Dineshbhai Panchal namely Shri Mishit D Panchal is also a Director. Now the incentive commission paid to these Directors is as follow:-

4.5.2 Thus, the payment of incentives is not according to the work done or qualification of the Directors. Had been it so, Shri Dineshbhai S Panchal who is a qualified engineer should have received at least equal or more incentive as compared to Shri. Yogeshbhai

S. Panchal who is simple B.Com and holder of Diploma in Business Management, or Shri Rohitbhai S Panchal who is simple B. Com and LLB. But these persons have been paid twice the amount of incentive paid to Shri Dineshbhai S Panchal. Hence, the appellant's submission that the incentive was paid to the Directors on account of new innovations in machinery made by them is contradicted by the amount of incentive paid to the Directors.

4.5.3 In fact, when the amounts of incentive paid to four Directors are compared, then it becomes evident that incentive has been paid to the three families controlling share holding of the appellant company during the financial year in equal ratio. If the amount of incentive paid to Shri Dineshbhai S. Panchal and his son Nishitbhai D. Panchal are added then amounts come toRs.26,76,726/- which is equal to the incentive paid to other two Directors. It can be mentioned here that as per the copy of resolution submitted by the appellant, during the course of appellate proceedings, the 4th brother i.e. Pravinbhai S Panchal has expressed his intention to exist from all the family members concerns and business run by the family members effecting from 31.03.2007 and proposed to transfer his shares including his family member's shares in the company to one or more remaining Directors or their family members at a consideration to be decided mutually between the Directors. From the details of share holding reproduced above, it is seen that all the 04 brothers along with their family member's were having share holding ofRs.7,50,000/- each of the appellant company. Since the family of Pravinbhai S. Panchal is not taking part in the business and as explained by the AR during the appellant proceedings, the transfer of shares holding by this family to other Directors is pending, hence effectively the family of three brothers who are also Directors were entitled for distribution of profit of the business of the appellant company. Such profit during this year was distributable in the ratio of 1/3 to each family. The appellant has distributed the profit to these three families in this ratio, but not declaring dividend, but making payments to them in the garb of incentive paid to the Directors in this ratio of 1/3. This clearly shows that the payments made to the Directors in the garb of incentive was a colourable devise and such payment was in lieu of dividend payable to the shareholders belonging to these three families.

4.5.4 The motive behind such distribution of profit in the garb of incentive is the fact that when a company declares a dividend it has to pay dividend distribution tax @ 15% as per the provisions of Section 115 O of the IT. Act, 1961. At the same time, no deduction on account of such dividend declaration is allowed to a company in computation of its taxable income. Thus, the entire amount paid as dividend is taxable in the hands of the appellant company @ 30%. Besides, the company has to pay dividend distribution tax @ 15% of this amount. Thus, when the profit is distributed by a company by making payment of dividend, the entire amount of dividend payment is subjected to effective tax rate of 45%. But if such dividend is paid to the shareholders in the garb of expenditure as done by the appellant, the entire expenditure is allowed as a deduction is computation of the total income of the company and the recipients pay the tax on such receipts as per the tax rate applicable to them. Hence, in the present case if the amount ofRs.71,30,178/-had been paid as dividend, then a tax ofRs.32,08,580/- by way of Income Tax and Dividend Distribution Tax had to be paid on such payment made by the appellant. But by making the payment in the garb of incentive, the tax paid by the Directors comes toRs.21,39,053/- only. Thus, the appellant's submission that there is no evasion of tax on j account of such payment of incentive to the Directors, as the Directors have paid the tax on such receipts at maximum marginal rate, is not correct.

4.5.5 A similar issue has been decided by Special Bench of ITAT Mumbai in the case of Dalai Broacha Stock Broking Private Ltd. 11 Taxmann.com 426 (Mumbai) (SB). After making detailed discussion of section 36(1)(ii) of the Act, the Bench had HELD, on similar facts, that the commission paid to the Directors was payable to them as profits or dividends if it had not been paid as commission. As already discussed in the present case, the incentive paid to the Directors are not on the objective basis of actual services rendered by them, but is solely on the basis of percentage of share holding of the Directors and their family members in the appellant company, This makes it beyond doubt that the incentive payment in the instant case was in lieu of dividend and hence the same is not allowable as deduction in the computation of total income of the appellant company. The Bench in its decision has also held that such commission paid will not be allowable as deduction as per the provisions of Section 37(1) of the IT Act as the provision of section 36(1)(ii) are specialized provision for such type of payments and hence general provisions of 37(1) cannot be taken for getting deduction of such payments. The Bench has also not accepted the plea taken on behalf of the assessee that since the commission paid was not in the ratio of shareholding of the persons who had been paid the commission, hence provisions of section 36(1)(ii) will not be applicable. The relevant observations of the Bench are as follows:-

"Thus, the legal position is that any expenditure on account of payment of commission to an employee will be allowable as deduction under the provisions of section 36(1)(ii), irrespective of the fact whether the employee is a shareholder or not or whether the commission has been paid for some extra services or for the some services, subject to the condition that the payment is not in lieu of dividend. However, in case extra services have been rendered for payment of commission, it will be one of the relevant factors to consider while deciding whether the case is covered by the exception provided in the section 36(1)(ii), i.e., whether the payment of commission is in lieu of dividend. In the instant case, no evidence was available on record to support the plea that the directors had rendered any extra services for payment of huge commission in addition to services rendered as an employee for which salary had been paid. [Para 7.11] The instant case involved a family business owned by the three directors who were not only shareholders but were also decision makers. They were also blood relations (father and sons). Therefore, they could easily show payment of dividend as commission and take the payment in such a manner that the same amount did not become payable as dividend though the total amount remained within the family. Considering the facts and circumstances of the case, the commission payment in the instant case was in lieu of dividend and, therefore, the claim could not be allowed only on the ground that the payment taken by the directors was not in the hold ing ratio. The device adopted by the assessee was obviously with the intention to avoid payment of full taxes. There was obvious tax avoidance. In case dividend would have been paid, the tax payable at the rate of 35.75 per cent in case of a company on the amount ofRs.1.20 crores would come toRs.42.90 lakhs and in ttiat case the company would have also to pay dividend distribution tax at the rate of 12.5 per cent which would come toRs.15 lakhs. The total tax payment in case of dividend payment would come toRs.57.90 lakhs whereas in case commission was paid, the tax payable would come toRs.39.60 lakhs. There was, thus, tax avoidance ofRs.18.30 lakhs. The provisions of section 36(1)(ii) are intended to prevent an escape from taxation by describing the payment as bonus or commission when, in fact, ordinarily it should have reached the shareholders as profit or dividend. In view of the discussion made earlier, the instant case was a case of paying commission which was otherwise payable as dividend to escape taxation. [Para 7.17]

In view of the foregoing discussion, the payment of commission ofRs.1.20 crores to the three working directors was in lieu of dividend and the same was not allowable as deduction under section 36(1)(ii). [Para 7.20]

The assessee also contended that commission paid for any extra services rendered by the shareholder employees would be covered by the provisions of section 37(1) which allows deduction on account of any expenditure incurred wholly and exclusively for the purpose of business, subject to the conditions mentioned in the section. The issue whether payment of bonus or commission to an employee will be covered by the provisions of section 36(1)(ii) or section 37(1) is also settled by the judgment of the jurisdictional High Court in the case of Subodhchandra Popatlal v. CIT [1953] 24 ITR 566 (Bom.) in which the High Court while dealing with similar provisions of the old Income-tax Act held that when an expenditure fell under section 10(2)(x) [which corresponds to section 36(1)(ii)], in the sense that it is an expenditure in the nature of bonus or commission paid to an employee for services rendered, then its validity can only be determined by the tests laid down in section 10(2)(x) and not by the tests laid down in section 10(2)(xv) which corresponds to section 37(1). Following the said judgment, the payment of commission to the three director employees had been rightly considered by the authorities below under the provisions of section 36(1)(ii) and the provisions of section 37(1) would not be applicable in such cases. [Para 8.2]"

4.6. On the basis of all these discussions, it is held that the incentive paid to the Directors by the appellant is not allowable as a deduction in computation of the total income as per the provision of Section 40A(2)(b) as well as the provision of Section 36(l)(ii) of the Act. Hence, the action of the AO is upheld and this ground of appeal is dismissed."

7. We have heard the rival submissions and perused the orders of the lower authorities and material available on record. In the instant case, the assessee company is engaged in the business of manufacturing of packing machines. The Assessing Officer observed that the assessee-company claimed deduction for Directors' remuneration ofRs.80,30,178/-; whereas in the immediately preceding year the Directors' remuneration paid wasRs.9,00,000/-. According to the Assessing Officer, the above huge rise in the Directors' remuneration cannot be attributed to business consideration. He, therefore, allowed deduction for Directors' remuneration ofRs. 9,00,000/- only and disallowed the entire increase in the Directors' remuneration ofRs.71,30,178/-.

8. On appeal, the CIT(A) confirmed the action of the Assessing Officer.

9. Before us, the AR of the assessee pointed out that the sales of the assessee-company in the immediately preceding year wasRs.99,80,414/- and the sales achieved by the assessee-company in the year under consideration wasRs.3,61,38,065/-. He contended that the above increase in sales were because of the hard-work put in by the Directors and therefore, the company, to remunerate such hard-work, paid Directors' remuneration ofRs.80,30,178/- in place ofRs.9,00,000/- paid in the immediately preceding year. He contended that the entire Directors' remuneration was paid out of commercial expediency and therefore, does not warrant any disallowance out of the same. He relied upon the following decisions/circular in support of his contention:-

(i) CIT vs. Consulting Engineering Group Ltd, [2014] 365 ITR 284 (Raj.)
"Business expenditure - Disallowance - Excessive and unreasonable payments - remuneration to Director - reasonableness of remuneration to be judged from point of view of businessman - Finding that remuneration was reasonable - Disallowance of part of remuneration - Not justified - Income-tax Act, 1961, S.40A(2)(a)."

(ii) CIT vs. Indu Nissan Oxo Chemical Industries Ltd. [2014] 45 taxmann.com 478 (Guj.)
"Section 40A(2) of the Income-tax Act, 1961 - Business disallowance - Excessive or unreasonable payments (Authorized payments) - Tribunal recorded that payment made to directors was authorized by CLB and that recipient of payment was taxed at maximum rate - Whether no addition could be made under section 40A(2) - HELD, yes [Para 8] [In favour of assessee]

(iii) DCIT vs. Mira Industries [2003] 87 ITD 475 (AHD)
"Section 40A(2) of the Income-tax Act, 1961 - Business disallowance - Excessive or unreasonable payments - Assessment Year 1992-93 - Whether since there was continuous growth and progress of assessee-company after joining of managing director remuneration (viz., 10 times increase in salary) equal to 10 per cent of net profit of assessee-company to Managing Director was reasonable and was, therefore, allowable for business consideration - HELD, yes."

(iv) Abbas Wazir (P.) Ltd vs. CIT (Allahabad High Court)
"….. When a company pays a higher salary to the directors or the mangers or other officers or employees as a matter of commercial expediency, it is not for the Income-tax Officer to say that in his opinion the said salary should not have been paid. A company may decide to pay a higher remuneration to its directors, officers or employees so as to encourage them to work hard, expand the business or for a host of other commercial considerations and the matter has to be looked at from the view point of the company."

(v) ACIT vs. Bombay Real Estate Development Company (P) Ltd. [2011] 64 DTR (Mum) (Trib.) 137

"Business expenditure - Disallowance under s. 40A(2) - Excessive or unreasonable payments to managing director - M is a chartered accountant and had quality experience of ten years as employee of a reputed company before joining the assessee company - He is stated to be running the entire show whereas the other two directors are not so qualified and do not take part in the business in the same way as M - Thus, comparison of the payment to M with the other two directors is not justified - AO has not brought on record anything to show that the payment made by the assessee company to M is excessive or unreasonable having regard to the fair market value of the services for which the payment was made or the benefits derived from such services - Therefore, the conditions of s. 40A(2) are not satisfied - Disallowance rightly deleted by CIT(A)."

(vi) CIT vs. Indo Saudi Services (Travel) (P) Ltd. (2008) 12 DTR (BOM) 304
"Business expenditure - Disallowance under s. 40A(2) - Payment of commission to sister concern - In view of CBDT Circular No.6-P, dt. 6th July, 1968 no disallowance is to be made in respect of payment to sister concern where there is no attempt to evade tax - Department not being able to show as to how 0.5 per cent higher commission paid by assessee company to its sister concern, which was also being assessed at higher rate, resulted in tax evasion, Tribunal was justified in deleting the addition."

(vii) Departmental Circular No.6-P (LXXVI-66) of 1968, dated 6th July, 1968]

"74. It may be noted that the new provision is applicable to all categories of expenditure incurred in businesses and professions, including expenditure on purchase of raw materials, stores or goods, salaries to employees and also other expenditure on professional services, or by way of brokerage, commission, interest, etc. Where payment for any expenditure is found to have been made to a relative or associate concern falling within the specified categories, it will be necessary for the Incometax Officer to scrutinize the reasonableness of the expenditure with reference to the criteria mentioned in the section. The Income-tax Officer is expected to exercise his judgment in a reasonable and fair manner. It should be borne in mind that the provision is meant to check evasion of tax through excessive or unreasonable payments to relatives and associate concerns and should not be applied in a manner which will cause hardship in bona fide cases. "

(viii) Coil Company (P) Ltd vs. ACIT (2012) 22 taxmann.com 75 (Del) (Trib.)

"…. The commission paid to 'MD' is linked with the sales turnover of the assessee and to the performance of the directors. It has nothing to do with the shareholding pattern. Consequently, the disallowance made by the Assessing Officer in respect of commission paid to 'MD' in all the three years is held not to be justified. Such disallowance deleted. [Para 8]"

10. On the other hand, the DR relied upon the orders of the lower authorities.

11. We find that Directors' remuneration during the year under consideration has been increased toRs.80,30,178/- fromRs.9,00,000/- paid in the immediately preceding year. Thus, the increase in remuneration is about 9 times of the Director's remuneration paid in the immediately preceding year. The above huge increment ought to be justified on the basis of increase in business turnover which is about 3.6 times as compared to immediately preceding year.

12. We find that the lower authorities have allowed the Director's remuneration during the year under consideration atRs.9,00,000/- which is exactly the same amount of Directors' remuneration which was paid in the immediately preceding year. Thus, in other words, according to the lower authorities, the entire increase in the Directors' remuneration during the year under consideration is unreasonable and unjustified. In our considered view, the above inference of the lower authorities cannot be sustained, specially when it is observed that the assessee-company's turnover has increased to 3.6 times i.e. fromRs.99,80,414/- toRs.3,61,38,065/-. In the background of such increase in turnover of the assessee-company, the contention of the assessee that the same was the result of hardwork put in by the Directors cannot be ruled out. Therefore, some increase in remuneration to Directors for their hard-work is certainly justified and reasonable. However, the increase in Directors' remuneration to about 9 times cannot be justified on the basis of above increase in the turnover. In our considered opinion, it shall be fair and reasonable, keeping in view the increase in turnover to 3.6 times, the increase in Directors' remuneration to 3.6 times of the immediately preceding year is justified. We, therefore, allow the Directors' remuneration of 3.6 times of the immediately preceding year which works out toRs.32,40,000/-and confirm the balance disallowance of Directors' remuneration ofRs.47,90,178/-. Thus, this ground of appeal of the assessee is partly allowed.

13. Ground No.2 of the appeal reads as under:-

"2. The Learned Commissioner of Income Tax (Appeals)-IV, Baroda has erred in law and on facts in directing the Assessing Officer as per the provision of Explanation to section 153 r.w.s. 150 of the Income Tax Act to tax the amount ofRs.6,03,954/- received from Happy Yammy Foods & Baverages during Asst. Year 2006-07 and 15,70,793/- received during A.Y. 2007-08 as income."

14. The brief facts of the case are that the Assessing Officer observed the assessee has shown advance against the order ofRs.21,74,747/- from Happy Yammy Foods and Beverages. The assessee was required to furnish the confirmation of the party with identity proof etc. The Assessing Officer observed that no confirmation and identity proof was furnished inspite of various opportunities of being heard provided. He observed that only copy of account of Happy Yammy Foods & Beverages was furnished stating that the advance received for manufacture of ice cream balls machinery and final discussion was awaited from the party and the assessee has shown semi finished work in progress in the stock. The Assessing Officer observed that the AR of the assessee even categorically declined to have further opportunities of being heard vide order sheet dated 18.12.2012. The Assessing Officer, therefore, held that the advance against order shownRs.21,74,747/- from Happy Yammy Foods & Beverages as unexplained cash credits for failure to discharge the onus u/s 68 of the Act and added the same to the income of the assessee.

15. Before the CIT(A), the assessee has submitted as under:-

"The advance ofRs.21,74,747/- from Happy Yammy Foods & Beverages, copy of account was furnished and stated that the advance received for manufacture of ice cream balls machinery of which final discussion is awaited from the party and has shown as semi-finished work in progress in the stock in the accounts.

The AO has gone through opening as well as closing stock of above work in progress to justify the advance.

The AO ignoring the facts and evidences produced and made addition ofRs.21,74,747/- from Yammy Food & Beverages as unexplained cash credits and added to the total income. It is requested your honour to appreciate facts and records of the case as explained above and delete entire addition as above and oblige.

i)       Directors remuneration be allowed                  Rs.71,30,178/-
ii)       Advance against order                                   Rs.21,74,747/-
         Total                                                           Rs.93,03,925/-

16. The CIT(A), after considering the submissions of the assessee, held as under:-

"5.3.1 So far as receipt of advance from Happy Yammy Foods and Beverages is concerned, neither during the assessment proceedings nor during the appellant proceedings, any details of this party or any confirmation from this party has been submitted. The submission of the appellant is that this amount was received as advance for manufacture of ice-cream balls machinery. The appellant had submitted the copy of ledger accounts of this company for the Financial year 2005-06, during which an amount ofRs.6,03,954/- had been received and of Financial year 2006-07, during which further amount ofRs.15,70,793/- had been received. The appellant has also submitted the copy of bank certificate of transfer of these amounts to the appellant company. The appellant had also submitted a self-certified true copy of an alleged correspondence sent by this creditor. But on this letter, no address or other details are mentioned of this party.

5.3.2 A perusal of all the documents submitted by the appellant shows that nowhere the address of this alleged creditor has been disclosed by the appellant. On the copy of performa invoice prepared by the appellant also, the address is, mentioned simply as 'Dubai-UAE'. Same is mentioned on the offer letter for manufacturing the machinery. Besides, no confirmation from this creditor or correspondence sent to this creditor by the appellant has been submitted either during the course of assessment proceedings or the appellate proceedings. Thus, the appellant has failed to prove the identity and creditworthiness of this alleged creditor. Under such circumstances, the amounts shown as advance from this creditor are liable to be taxed as unexplained cash credit in the hands of the appellant as per the provisions of Section 68 of the IT. Act, 1961. But at the same time, this amount can be added to the total income in the hands of the appellant in the year in which the amount was credited in the books of accounts of the appellant company. Hence, the AO is directed to tax these amounts as income of the appellant in the assessment years 2006-07 & 2007-08 relevant to the financial years 2005- 06 & 2006-07 respectively during which the amounts were received by the appellant company, as per the provisions of explanation to Section 153 r.w.s. 150 of the IT Act, 1961. Accordingly, the addition made in the current year is directed to be deleted."

17. We have heard the rival submissions and perused the orders of the lower authorities and the material available on record. In the instant case, the Assessing Officer observed that the assessee has claimed to have received advance ofRs.21,74,747/- from Happy Yammy Foods & Beverages. The assessee explained that the advance was received for manufacturing and supply of ice cream balls machinery and that final discussion was awaited from the party and that semi-finished machine was shown as work in progress. The Assessing Officer observed that evidences to establish the identity and creditworthiness of the said party was not furnished and addedRs.21,74,747/- to the income of the assessee by invoking provisions of Section 68 of the Act during the year under consideration i.e. AY 2010-11.

18. On appeal, the CIT(A) observed that advance was received by the assessee in the previous years relating to the AY 2006-07 (Rs.6,03,694/-) and AY 2007-08 (Rs.15,70,793/-). As the amounts were not credited for the first time in the books of the assessee of the year under consideration and the same was brought forward balance, the same could not be added to the income of the assessee by invoking provisions of Section 68 of the Act. Therefore, the CIT(A) deleted the addition ofRs.21,74,747/- made u/s 68 for the year under consideration.

19. However, the CIT(A) went on further and directed the Assessing Officer to addRs.6,03,954/- in the AY 2006-07 and addRs.15,70,793/- to the income of the assessee in the AY 2007-08.
20. The above direction was given purportedly u/s 153 r.w.s. 150 of the Act.
21. The assessee, being aggrieved by this further direction, is in appeal before us.
22. The case of the assessee is that the further direction given by the CIT(A) is without jurisdiction and unwarranted.
23. The DR supported the order of the CIT(A).

24. We find that the issue before the CIT(A) was that whether the advance received in earlier years and credited in the books of account of the assessee in earlier years and which was not credited for the first time in the books of account of the assessee of the year under consideration but was merely a brought forward balance can be added to the income of the assessee of the year under consideration or not by invoking provisions of Section 68 of the Act.

25. We find that this issue was correctly decided by the CIT(A) that this amount cannot be deemed as income of the year under consideration by invoking provisions of Section 68 of the Act. In deciding this issue, it was not necessary to adjudicate whether the amount in question could be deemed as income of any earlier year or years or not. Therefore, the further direction by the CIT(A) was not necessary for deciding the issue which was before him. Therefore, in our considered view, the further direction given by the CIT(A) to deemRs.6,03,954/- as income of the AY 2006-07 andRs.15,70,793/- as income of the AY 2007-08 was not in accordance with the provisions of Section 153(3) of the Act and therefore bad in law.

26. Our above view finds support from the decision of the Hon'ble Supreme Court in the case of CIT, Simla Vs. M/s. Green World Corporation in Civil Appeal No.3312 of 2009, order dated 06.05.2009, wherein the Hon'ble Supreme Court has referred the case of Rajinder Nath vs. CIT, Delhi [120 ITR 14 (SC)] and observed that in the case of Rajinder Nath (supra) the Hon'ble Supreme Court has held as under:-

"42. "The expressions "finding" and "direction" are limited in meaning. A finding given in an appeal, revision or reference arising out of an assessment must be a finding necessary for the disposal of the particular case, that is to say, in respect of the particular assessee and in relation to the particular assessment year. To be a necessary finding, it must be directly involved in the disposal of the case. It is possible in certain cases that in order to render a finding in respect of A, a finding in respect of B may be called for. For instance, where the facts show that the income can belong either to A or B and to no one else, a finding that it belongs to B or does not belong to B would be determinative of the issue whether it can be taxed as A's income. A finding respecting B is intimately involved as a step in the process of reaching the ultimate finding respecting A. If, however, the finding as to A's liability can be directly arrived at without necessitating a finding in respect of B, then a finding made in respect of B is an incidental finding only. It is not a finding necessary for the disposal of the case pertaining to A. The same principles seem to apply when the question is whether the income under enquiry is taxable in the assessment year under consideration or any other assessment year. As regards the expression "direction" in Section 153(3)(ii) of the Act, it is now well settled that it must be an express direction necessary for the disposal of the case before the authority or court. It must also be a direction which the authority or court is empowered to give while deciding the case before it. The expressions "finding" and "direction" in Section 153(3)(ii) of the Act must be accordingly confined. Section 153(3)(ii) is not a provision enlarging the jurisdiction of the authority or court."

27. We further observe from the order of the CIT(A) that no specific opportunity of hearing was allowed by the CIT(A) to the assessee before issuing the above mentioned further direction and therefore, the further direction was bad in law on this count also. We, therefore, delete the further direction mentioned above of the CIT(A) to tax the amount ofRs.6,03,954/- in the AY 2006-07 andRs.15,70,793/- in the AY 2007-08 u/s 153 r.w.s. 150 of the Act. Thus, this ground of appeal of the assessee is allowed.

28. In the result, the appeal of the assessee is partly allowed.

Order pronounced in the Court on Friday, the 31st of October, 2014 at Ahmedabad.

Appeal partly allowed.